SHIFTING TAXATION FROM LABOUR TO EMISSIONS - Open letter to the EU institutions

A more effective carbon pricing system will help to reduce fossil fuel use. Redistributing its revenues can ease the energy transition for vulnerable households. 

 

Open letter to the EU for a global and sustainable carbon pricing inspired by peer reviewed  manuscripts and by the research of nobel prizes.  

Global warming is a global challenge and an environmental and economic emergency (1,2). Economists and  institutions no longer doubt that carbon pricing, implemented as an Emissions Trading System, like the EU ETS, is the most efficient and effective way to reduce GHG emissions. Academics and experts have found  that, to limit global warming in line with the Paris Agreement, carbon pricing must be expanded globally, with a price of at least $75 by 2030 (3). Moreover, according to a recent study, a fair green transition would require wealthy, high-emitting nations to phase out all oil and gas production by 2034 while the poorest nations would have until 2050 to end production (4).

Yet, some EU governments and parts of the European Parliament mistakenly see carbon pricing as an economic risk. Even in Europe, where the world’s largest carbon pricing system (the EU ETS) is in force, free CO2 permits are still provided to energy-intensive industries, even for sectors for which evidence of carbon-leakage risks is weak. Some governments continue to provide billions of euros of subsidies to the fossil-fuels economy in the name of social welfare and economic competitiveness (5,6).  

A robust carbon pricing system, necessary to fight the climate emergency, would lead to a significant and  persistent fall in GHG emissions, but also to an increase in energy and materials prices. Related costs would disproportionately fall on low-income households requiring counterbalancing measures (7).

For this reason, redistributing carbon pricing revenues to such households is necessary to reduce the economic costs of carbon pricing and to strengthen public support for an effective carbon pricing initiative (8,9). This approach is vital for any carbon pricing system and should be a main pillar of a future carbon pricing agreement (Climate Club) with global reach, to be urgently promoted world-wide. With this initiative, we ask to the European Parliament and the Council (10): 

  • To strengthen the major elements of the Fit for 55 Package (11), to achieve a reduction of  EU greenhouse emissions by 65% and not just 55% on 1990 levels and adopt provisions to achieve the carbon neutrality (Net Zero) by 2045.
  • To strengthen the EU carbon pricing system (ETS) by setting a faster phase-out of free allowances (2030) and allowing an uncapped carbon price also of heating or transport sectors as necessary to achieve emissions reduction goals. 
  • To redistribute a substantial part of carbon pricing revenues to low-income households, thereby shifting taxation from labour to the consumption of non-renewable resources, thus strengthening the EU’s social climate fund
  • To globally promote the establishment of a “Climate Club” (12) where all participant countries adopt robust carbon pricing system, with due consideration of redistributing carbon pricing revenues to low-income households.  

The Climate Club is expected to establish a Global Incentive Fund (13), to which every country with current or historical per-capita CO2 emissions above the global average contributes with a proportional fee. The fund will be used to support sustainable initiatives in low-GDP countries.

 

Notes and references 

1 Council of the European Union - Climate change costs lives and money, 2020. 

2 European Environment Agency, Economic losses from climate-related extremes in Europe. 2023. 

3 S. Black, I. Parry, More Countries Are Pricing Carbon, but Emissions Are Still Too Cheap, International Monetary Fund, 2022.

4 D. Calverley, K. Anderson, Phaseout Pathways for Fossil Fuel Production within Paris-compliant carbon budgets, 2022.

5 European Court of auditors, “Energy taxation, carbon pricing and energy subsidies”, 2022.  

6 C. Maarfield et al., Fossil Fuel Subsidies in the EU, CAN Europe, 2023. 

ISPI. From the Green Deal to REPowerEU: The Green Transition in Europe and Beyond, 2022.  

8 Carattini S, Carvalho M, Fankhauser S. Overcoming public resistance to carbon taxes. Wiley Interdiscip Rev Clim Change. 2018.

9 Fiscal and Distributional Analysis of the Federal Carbon Pricing System, Ottawa, Canada, 2019.  

10 Reference treaty articles (TFEU): Article 191, 192, 193 of “The treaty on European union and the treaty on the functioning of the  European Union”.  

11 European Commission, “Fit for 55”: delivering the EU's 2030 Climate Target on the way to climate neutrality, 2021, COM(2021) 550.

12 William Nordhaus, Climate Clubs: Overcoming Free-riding in International Climate Policy, American Economic Review, 105(4):  1339–1370, 2015. 

13 R. Rajan, A Global Incentive Scheme to reduce carbon emissions, University of Chicago Booth School, 2022.

 
 
Fill out the online form.