Project Summary

The necessity to combat climate change has been widely recognised at the political level which led to international agreements to (drastically) reduce global greenhouse gas emissions (Kyoto Protocol, Paris Agreement). Regarding the design of policies for the decarbonisation of our economies, there has been an extensive scientific debate focusing on the optimal instrument choice in order to control greenhouse gas (GHG) emissions. Economic theory favours market-based instruments such as taxes or emissions trading over command-and-control regulation as these instruments do not only ensure environmental effectiveness but also economic efficiency, i.e. emission reductions at lowest costs.

The EU has committed itself to ambitious emission reduction targets: The European Climate Law has an emission reduction target of 55% until 2030, for 2050 carbon neutrality is strived for.

For large emitters in industry and energy generation the EU has established the European Emission Trading System (EU ETS) in 2005, which covers about 45% of total GHG emissions in the EU. For these sectors an EU-wide GHG reduction target of 62% compared to 2005 levels is targeted for 2030.

Instead, emissions from other sources, most notably from the household and transport sectors, are regulated at Member State level and should be reduced by 40% by 2030, with differentiated reduction targets defined for the individual Member States. For the Non-ETS sectors, national energy and carbon taxes are a key instrument for reducing GHG emissions. Yet, in most cases energy taxation does not correspond to the theoretical concept of optimal (uniform) energy or carbon taxes. While some harmonisation was achieved through the 2003 Energy Taxation Directive (COM 2003/96/EC) that defines minimum excise duty rates for the different energy sources, tax rates still vary substantially between Member States. Carbon taxes — that have been implemented in about one third of the EU Member States — show an even higher variation and were only in a few cases (e.g. Sweden, Finland, Denmark) introduced in the context of a comprehensive environmental tax reform.

In its Communication 'A more efficient and democratic decision making in EU energy and climate policy' (COM (2019) 177), the European Commission stressed that 'the absence of an increase in minimum rates for more than a decade at EU level has eroded the tax-induced price signal that was supposed to encourage investment in energy-efficient technology and behaviour' and points at 'a risk of growing distortion of competition in the Single Market and an erosion of the tax base in high-taxing countries, notably for motor fuels that can be easily and legally transported across borders' due to increasing differences in energy taxation between Member States. According to this Communication energy taxation should be designed in a way to stimulate the use of clean energy and reflect the polluter pays principle, both of which could be addressed by a carbon tax.

The unanimity requirement in taxation issues has proven to be a major obstacle for reforming energy taxation in the EU as well as for introducing other climate-related taxes. Not least due to resistance of some Member States (notably Poland), no progress towards EU CO2 taxes is currently in sight.

Lately, the issue of carbon pricing also gained in momentum at the national level. The German expert panel for the assessment of the economic growth (Sachverständigenrat der Deutschen Wirtschaft) called for the establishment of a price signal for CO2 emissions in order to reach the future GHG emission reduction targets. For the long term the expert panel favours the idea of including Non-ETS sectors like transport in the EU ETS, while for the short term it stresses the advantages of CO2 taxes that can be also implemented unilaterally at the national level. In the campaigns for the Austrian national parliamentary elections in September 2019 climate change and CO2 taxes have also been a key point of discussion. While some parties suggested to implement CO2 taxes on the national level, the large parties oppose a unilateral CO2 tax for Austria because of potential negative impacts on the economy or vulnerable household groups. For the same reason some other Member States like Poland show a general opposition against ambitious climate policy.

The project SoMBI focuses on two research questions:

To answer these questions, we will perform a model-based analysis with the new 'ADAGIO-DYNK' model. The model will be used to estimate the carbon price necessary to achieve the 40% EU-wide reduction target for the Non-ETS sectors. Moreover, it will also deliver detailed results on the country level. We will discuss these detailed results for two case study countries that differ considerably in terms of the structure of their energy systems and economies — Austria and Poland. First, we will focus on the macroeconomic and GHG effects of the introduction of the tax as well as the distributional effects of such price mechanisms for different household types. Moreover, different revenue recycling options will be assessed in terms of their macroeconomic and distributional impacts. Based on the modelling results and a comprehensive literature review, policy recommendations regarding the introduction of an EU-wide carbon tax and adequate recycling schemes will be developed.

Last update: February 2023

This research was funded by the Jubiläumsfonds of the Oesterreichische Nationalbank (OeNB).