Market Mechanisms for Reducing Emissions and the Introduction of a Flexible Consumption Tax

The ECSC Treaty lasting for 50 years from the date of its entry into force remained in force until 23 July 2002.

The Maastricht Treaty has included «measures in the field of energy, civil protection and tourism» (Art. 3, par. 1, lit. u).

Treaty on European Union, signed at that time by twelve members of the European Community on 7 February 1992, entered into force in 1993.

This package opened to an integrated energy and climate policy.

Then, with Directive 2004/101/EC, the European Union (EU) has recognized within the ETS the carbon credits generated from the flexible mechanisms of the KP (Clean Development Mechanism and Joint Implementation).

Extending the scope for 2013–2020 by including other GHG, which bring inside the ETS such as aviation.

The package with a target on emission reduction of 40% by 2030 consisted of several proposals: revision of five directives, revision of four regulations, three new regulations, two decisions, three communications and several preparatory and impact studies.

For a comparative analysis between the levels of sustainability of the various EU countries, see Cucchiella et al. (2017).

The European Green Deal. Brussels, 11.12.2019. COM (2019) 640 final is included in the Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions.

Submission by Croatia and the European Commission on behalf of the European Union and its Member States Zagreb, 6 March 2020 Subject: Long-term low GHG development strategy of the European Union and its Member States. https://​unfccc.​int/​sites/​default/​files/​resource/​HR-03-06-2020%20​EU%20​Submission%20​on%20​Long%20​term%20​strategy.​pdf

The EU’s 2021–2027 long-term budget & NextGenerationEU Facts and figures. Published: 2021-04-29 by Directorate-General for Budget (European Commission).

Ahmed et al. (2021).

The EU ETS operates according to the limitation principle, which ensures that the available allowances have a value and can be traded. A ceiling is set on the total quantity of ETS GHG allowances that can be emitted by plants governed by this scheme: companies receive or buy emission allowances, which, if necessary, they can exchange. At the end of each year, companies must return enough allowances to cover their real emissions if they do not want to face fines. If a company reduces its emissions, it can keep unused allowances to cover future needs, or sell them to another company that is short of them. The exchange should create flexibility and ensure that emissions reductions occur when they are cheaper. The price of CO₂ should encourage investments in clean and low-emission technologies.

The ETS has suffered macroeconomic factors such as the 2008 financial crisis and will be impacted by the economic consequences of the COVID-19 pandemic. See the Report from the Commission to the European Parliament and the Council on the functioning of the European carbon market. COM/2019/557 final/; see also Gerbeti (2010).

Decision (EU) 2015/1814 of the European Parliament and of the Council of 6 October 2015 concerning the establishment and operation of a market stability reserve for the Union GHG trading scheme and amending Directive 2003/87/EC.

Commission Regulation (EU) No. 176/2014 of 25 February 2014 amending Regulation (EU) No. 1031/2010 in order to determine, in particular, the volumes of allowances to be auctioned in the period 2013–2020. Back loading is a “postponement” of the auctioning of quotas in phase III. This “postponement” of the volume put up for auction does not reduce the total number of allowances to be auctioned during phase III, but only changes their distribution over the period. The auction sales volume fell by 400 million allowances in 2014, 300 million in 2015 and 200 million in 2016.

Brussels, 24.12.2009 SEC (2009) 1710 final draft Commission staff working document impact assessment accompanying document to the Commission Decision determining a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage pursuant to Article 10a (13) of Directive 2003/87/EC (2009)10251 final. Cit. The price used should be based on an average carbon price according to the Commission’s Impact Assessment accompanying the Package of Implementation measures for the EU’s objectives on climate change and renewable energy for 2020, which is interpreted as an allowance price of 30€/tCO₂.

The ETS IV emission reduction target is also being updated to align it with the new European targets for 2050 and the Paris Agreement. Cf. German Environment Agency, EU ETS up to 2030: Adjusting the Cap in light of the IPCC 1.5 C Special Report and the Paris Agreement, 07/2020, which concludes that the linear reduction factor must be increased also to save the effectiveness of the ETS. cit. pg. 26: “Our analysis shows that the main parameter of the EU ETS, the linear reduction factor (LRF) of its cap—set at 2.2% for the period 2021–2030—is substantially out of line”.

On 27 February 2018, the Council formally approved the reform of the EU emissions trading system (ETS) for 2021–2030 phase.

See Santibanez-Gonzalez (2017a, b). Installations for the capture of CO₂, to pipelines for transport of CO₂ or to CO₂ storage sites, where he explores the relationship between establishing a pricing policy (tax) on carbon dioxide emissions to the atmosphere and the design of a supply chain network to capture and sequester carbon dioxide in geological reservoirs.

Until March 2018, the price was lower than € 10 tonne/CO_2eq.

See footnote 13.

March 2021, 40, 57 €. Source Sendeco.

Cfr. Directorate-General for Climate Action (2015), Study on the Impacts on Low Carbon Actions and Investments of the Installations Falling under the EU Emissions Trading System (EU ETS), cit. pg. 179. “To what extent is EU ETS a driver for low carbon investment and operational decisions? How does the EU ETS influence decision-making? To what extent has this varied over the life of the EU ETS to date? What were the other drivers and what was the relative importance of the EU ETS in comparison to the other drivers? Based on our case studies and interviews, it becomes clear that carbon abatement and the carbon price were not the primary driving factors for most companies and sectors to invest in carbon efficient solutions. Instead, the main impetus came from the need for companies to reduce energy and raw material costs and their broader strategic turn towards sustainable production, based on increasing environmental awareness of stakeholders and consumer markets”.

Negotiations have begun for the revision of the RED II Directive to align it with the European Green Deal. From the first results of the public consultation, it seems that a RES target will also be introduced for the industry.

Lakshmi Mittal, chairman and chief executive of Arcellor Mittal, the world’s largest steel producer, said that there is an urgent need to approve a tax on goods imported into Europe from countries that do not have a carbon price and that this is “the best answer on climate change”. https://​www.​ft.​com/​content/​8341b644-ef95-11e6-ba01-119a44939bb6 12 February 2017. Thus, former American Secretaries of State, Baker and Shultz, and former Secretary of the Treasury, Paulson, recently promoted an internal carbon tax and, of course, a border adjustment tax in the new administration. International New York Times of 09/02/2017.

See on this point Grubb and Neuhoff (2006) who state “Border tax adjustments, similarly, are unlikely to be ‘all or nothing’. They would instead be considered in the context of particular industries and products, where a valid case for competitiveness concern was raised, and for which other solutions appeared inappropriate”. Adding “Moreover, WTO law (and arguably EC State-aid law) may allow border tax adjustments that compensate for actual costs incurred, but not for opportunity costs”. Cit. pp 35, 38.

COM (2020) 102 final. Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions. A New Industrial Strategy for Europe” Brussels, 10.3.2020, which states that, “Should differences in ambition around the world persist, the Commission will propose a Carbon Border Adjustment Mechanism in 2021 to reduce the risk of carbon leakage, in full compatibility with WTO rules. This should be supported by strengthening our current tools to tackle carbon leakage”.

Ministère de l’écologie, de l’énergie, du développement durable et de l’aménagement du territoire, France. Preventing carbon leakage through a border adjustment mechanism Bruxelles—le 11 avril 2008. This proposal refers to Directive 2009/29/EC Article 10b “ By 30 June 2010, the Commission shall, in the light of the outcome of the international negotiations and the extent to which these lead to global greenhouse gas emission reductions, and after consulting with all relevant social partners, submit to the European Parliament and to the Council an analytical report assessing the situation with regard to energy-intensive sectors or subsectors that have been determined to be exposed to significant risks of carbon leakage. This shall be accompanied by any appropriate proposals, which may include: (b) inclusion in the Community scheme of importers of products which are produced by the sectors or subsectors determined in accordance with Article 10a”.

From an environmental point of view, there would be no benefit in considering that emissions from products imported into the EU are included in the average emissions of EU products.

The world’s largest oil consumers are China (3.1 Gtep), USA (2.3 Gtep) and India (0.929 Gtep); the largest coal consumers and producers are the same countries and are China produces 44.7% of the world total followed by India 9.7% and USA 9.2%. Cfr. International Energy Agency (2019).

DG Trade (2014).

COM (2019) 640 final. Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions. The European Green Deal. Brussels, 11.12.2019: “As long as many international partners do not share the same ambition as the EU, there is a risk of carbon leakage, either because production is transferred from the EU to other countries with lower ambition for emission reduction, or because EU products are replaced by more carbon-intensive imports. If this risk materializes, there will be no reduction in global emissions, and this will frustrate the efforts of the EU and its industries to meet the global climate objectives of the Paris Agreement”.

Intergovernmental Panel on Climate Change defines the carbon leakage as the increase in CO₂ emissions outside countries that undertake a divided domestic mitigation action to reduce emissions from these countries" cit. Climate Change 2007: Mitigation; Contribution of Working Group III to the Fourth Assessment Report of the IPCC.

Assessing the factors behind CO2 emissions changes over the phases 1 and 2 of the EU ETS: an econometric analysis, Gloaguen and Alberola (2013).

Cfr, https://​ec.​europa.​eu/​clima/​policies/​ets/​allowances/​leakage_​en “Carbon leakage refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints. This could lead to an increase in their total emissions. The risk of carbon leakage may be higher in certain energy-intensive industries”.

From the Treccani Encyclopaedia: “environmental dumping occurs when a company can place goods on the market at lower prices because they are produced at lower costs in countries where there is no legislation for environmental protection”.

On the importance of free allowances for carbon leakage sectors see Clò (2011) and on the contrary (Joltreau & Sommerfeld, 2019).

Cfr. European Green Deal (2019), “the Commission will propose a carbon border adjustment mechanism, for selected sectors, to reduce the risk of carbon leakage. It would be an alternative to the measures (such as the free allocation of emission allowances or compensation for the increase in electricity costs) that address the risk of carbon leakage in the EU's Emissions Trading System”.

The difficult feasibility of applying a border tax, which does not give the importer the opportunity to demonstrate, is confirmed by the Court’s judgment of 2 April 1998. Outokumpu Oy. Reference for a preliminary ruling: Uudenmaan lääninoikeus—Finland. Manufacturing tax on electricity—Tax rates differentiated according to the mode of production of electricity of national origin—Single rate for imported electricity. Case C-213/96. Indeed, it specifies that Finnish legislation “also does not give the possibility to the importer to demonstrate that the electricity imported by him was produced under certain conditions in order to benefit from the rate in force as the national electricity with the same modality”.

Finding economic convenience, maximizing profit and saving in raw materials that pays is intrinsic to entrepreneurial activity.

All the CO₂ adjustment mechanisms at the border require a fund to be set-up. It never happens that their use is reinvested 100% for the benefit of the environment. Not even the revenues of the CO₂ auctions are totally dedicated to reducing emissions.

Despite the recent revision of the ETS system through the adoption of Directive 2018/410/EU, where while recognizing the problem of carbon leakage, it does not take the opportunity to truly address it. So until 2030, presumably we will continue with the free allocation and economic compensation “in favour of the sectors or subsectors exposed to a concrete risk of carbon leakage due to significant indirect costs actually incurred in relation to the costs of GHG transferred to electricity prices”.

Brussels, 11.12.2019 COM (2019) 640 final Communication from the Commission, The European Green Deal. “As long as many international partners do not share the same ambition as the EU, there is a risk of carbon leakage, either because production is transferred from the EU to other countries with lower ambition for emission reduction, or because EU products are replaced by more carbon-intensive imports. If this risk materializes, there will be no reduction in global emissions, and this will frustrate the efforts of the EU and its industries to meet the global climate objectives of the Paris Agreement”.

See the research of Rui Shan Oak Ridge National Laboratory, USA; Yaojin Sun, University of Tennessee, USA; and Sylvain Audette, HEC Montréal, Canada. Bitcoin mining to reduce the renewable curtailment: a case study of CAISO. 4th AIEE Energy Symposium. Current and Future Challenges to Energy Security. Conference Proceedings. 10–12 December, in Rome, Italy. Published 2019 by: The Italian Association of Energy Economists (AIEE), Rome, Italy, page 61, “Although these numbers are subjected to the change of machine price, electricity rate and regulatory issues, bitcoin price and the hash rate, they can qualitatively tell that by combining Bitcoin mining and renewable curtailment, we can mitigate the environmental concerns and generate economic benefits”.

Gerbeti (2019).

Acronym of Fabbrica Italiana Automobili Torino.

https://​www.​theguardian.​com/​technology/​2018/​apr/​25/​from-seattle-to-luxembourg-how-tax-schemes-shaped-amazon.

https://​www.​corriere.​it/​economia/​finanza/​19_​giugno_​16/​vietnam-crescita-record-yacht-perche-nuova-frontiera-super-ricchi-7b3f80e0-82e9-11e9-9233-14aa8d8cebf9.​shtml.

Source Hanoi General Office of Statistics (2020).

Charge on Emissions (Imposta sulle Emissioni Aggiunte) based on the book “CO₂ nei beni e competitività industriale europea” (2014) was object of a resolution of the joined Commissions X and XIII, approved at the conclusion of the examination of the deal assigned on competitive asymmetries for European industry deriving from the low energy costs and low environmental standards in non-EU Countries, 1 August 2017. Doc. XXIV, n. 79 of the Italian Senate's Joint Commissions Productive Activities and Environment.

Cfr. United Nations Environment Programme and the World Trade Organization (2009) in Trade and Climate Change, says “the carbon constraint in future emission trading schemes (for example, in Phase III of the EU-ETS) is expected to be more stringent, with a lower capped limit and fewer free allowances. This may therefore increase the potential impact of carbon costs on the competitiveness of a number of industrial sectors”. Cit. pg. 21.

The General Agreement on Tariffs and Trade (GATT 1947), Part I, Article II: Schedules of Concessions, 2° par: “Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product: (a) a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III* in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part;”.

Environmental protection has historically been directed, in the context of administrative law, towards two major strands, on the one hand the imposition of limits and obligations, on the other an environmental protection through the market with the creation of artificial markets (green, white, ETS certificates). In the book “A Symphony for energy” 2015, Editoriale Delfino is represented a “third way” (cit. Staffetta Quotidiana) compared to the two classic strands, which enhances CO₂ in the production process and follows its paths in international trade.

Opinion of the European Economic and Social Committee on ‘The sectoral industrial perspective on reconciling climate and energy policies’ (own-initiative opinion) (2019/C 353/10). Official Journal of the European Union, 18.10.2019, considers the Charge on Emissions one of alternatives to solve the unfair competitiveness issue contemporanei to reduce emissions.

Gerbeti (2014).

VAT was the first tax to be broadly harmonized at EU level, so back in 1970 it was logical to introduce a VAT-based EU budget own resource as a source of revenue alongside customs duties on imports and agricultural levies. https://​ec.​europa.​eu/​info/​strategy/​eu-budget/​long-term-eu-budget/​2021-2027/​revenue/​own-resources/​value-added-tax_​en.

For tax arrangements applicable to intra-Community supplies and exports of goods, in Italy is in force Decreto-legge del 30 agosto 1993 n. 331 on harmonization of provisions relating to taxes on mineral oils, alcohol, alcoholic beverages, manufactured tobacco and VAT with those laid down in EEC Directives and consequent amendments thereto, as well as provisions on the regulation of approved tax assistance centres, procedures for tax refunds, the exclusion from ILOR of entrepreneurial income up to the amount corresponding to the direct employment contribution, the introduction of an extraordinary tax on certain assets and other tax provisions for 1993. Article 41, paragraph 1 “Intra-Community non-taxable supplies” provides the details for the territoriality for VAT. For supplies, the taxation regime in the EU State of destination of the goods subject to the transaction shall apply.

The plastic own resource, in place since 1 January 2021, consists of a national contribution based on the amount of non-recycled plastic packaging waste. This own resource is closely linked to the EU policy priorities. This is expected to encourage Member States to reduce packaging waste and stimulate Europe's transition towards a circular economy by implementing the European Plastics Strategy. At the same time, it leaves Member States the possibility to define the most suitable policies to reduce plastic packaging waste pollution in line with the principle of subsidiarity. A uniform call rate of €0.80 per kilogram will be applied to the weight of plastic packaging waste that is not recycled, with a mechanism to avoid excessive contributions from less wealthy Member States. https://​ec.​europa.​eu/​info/​strategy/​eu-budget/​long-term-eu-budget/​2021-2027/​revenue/​own-resources/​plastic-own-resource_​en.

https://​ec.​europa.​eu/​info/​strategy/​eu-budget/​long-term-eu-budget/​2021-2027/​revenue/​potential-new-sources-revenue_​en. Since 2018, the Commission has proposed several solutions for new sources of revenue of the EU budget. A new contribution based on the non-recycled plastic packaging waste has now been introduced. Work towards the introduction of sources of revenue linked to a carbon border adjustment mechanism, a digital levy and the EU Emission Trading System (EU ETS) continues.

Cfr. Scalia (2020).

The expectation is to have a shift from CO2 intensive product to other less harmful for the environment. The awareness campaign towards consumers is intrinsic to the proposed mechanism. This because the evidence of having two equal products with VAT differentiated according to the content of CO₂ intends to direct precisely the choices of the consumer towards the most sustainable product.

From Wikipedia: Life-cycle assessment or LCA (also known as life-cycle analysis) is a methodology for assessing environmental impacts associated with all the stages of the life-cycle of a commercial product, process, or service. For instance, in the case of a manufactured product, environmental impacts are assessed from raw material extraction and processing (cradle), through the product's manufacture, distribution and use, to the recycling or final disposal of the materials composing it (grave). Widely recognized procedures for conducting LCAs are included in the 14,000 series of environmental management standards of the International Organization for Standardization (ISO), in particular, in ISO 14,040 and ISO 14,044.

Treccani, Volume III. Nuovi Sviluppi: Energia, Trasporti, Sostenibilità, cap. 7. Confronto tra sistemi energetici. http://​www.​treccani.​it/​export/​sites/​default/​Portale/​sito/​altre_​aree/​Tecnologia_​e_​Scienze_​applicate/​enciclopedia/​italiano_​vol_​2/​631-650_​ita.​pdf.

Cfr. Directive 2009/29/CE art 10 a. par. 15. sector or subsector shall be deemed to be exposed to a significant risk of carbon leakage if: (a) the sum of direct and indirect additional costs induced by the implementation of this Directive would lead to a substantial increase of production costs, calculated as a proportion of the gross value added, of at least 5%; and (b) the intensity of trade with third countries, defined as the ratio between the total value of exports to third countries plus the value of imports from third countries and the total market size for the Community (annual turnover plus total imports from third countries), is above 10%”. And in par 16. “Notwithstanding paragraph 15, a sector or subsector is also deemed to be exposed to a significant risk of carbon leakage if: one of values a and b of par. 15 is, respectively, at least 30% or above 30%. With the dir. 2018/410/UE the concept of carbon leakage is in article 10° par.1. “Sectors and subsectors in relation to which the product resulting from multiplying their intensity of trade with third countries, defined as the ratio between the total value of exports to third countries plus the value of imports from third countries and the total market size for the European Economic Area (annual turnover plus total imports from third countries), by their emission intensity, measured in kgCO₂, divided by their gross value added (in euros), exceeds 0,2, shall be deemed to be at risk of carbon leakage. Such sectors and subsectors shall be allocated allowances free of charge for the period until 2030 at 100% of the quantity determined pursuant to Article 10a”.

Cfr Directive 2009/29/CE, article 10a “Transitional Community-wide rules for harmonized free allocation” par. 2. In defining the principles for setting ex-ante benchmarks in individual sectors or subsectors, the starting point shall be the average performance of the 10% most efficient installations in a sector or subsector in the Community in the years 2007–2008. The Commission shall consult the relevant stakeholders, including the sectors and subsectors concerned. Cfr. the revision from dir. 2018/410/UE (2021–2030) par. 2. “For the period from 2021 to 2025, the benchmark values shall be determined on the basis of information submitted pursuant to Article 11 for the years 2016 and 2017. On the basis of a comparison of those benchmark values with the benchmark values contained in Commission Decision 2011/278/EU (European Commission 2011) as adopted on 27 April 2011, the Commission shall determine the annual reduction rate for each benchmark, and shall apply it to the benchmark values applicable in the period from 2013 to 2020 in respect of each year between 2008 and 2023 to determine the benchmark values for the period from 2021 to 2025”.

In this sense, cf. Article 30 “Review in the light of the implementation of the Paris Agreement and the development of carbon markets in other important economies” of Dir. 2018/410 /EU, where this idea is considered in paragraph 2. “The measures to support certain energy-intensive industries that may be subject to carbon leakage referred to in Articles 10a and 10b shall also be kept under review in the light of climate policy measures in other major economies. In this context, the Commission shall also consider whether measures in relation to the compensation of indirect costs should be further harmonized”.

The impact of Charge on added emissions on the overall demand of goods imported into the EU will, of course vary according to the cost attributed to CO₂. However, in my opinion, this interesting point should be addressed extensively in a specific paper.

In which the Report on the limits of development (from the book The Limits to Growth. The limits of development), commissioned to MIT by the Club of Rome (1972), had a fundamental stage.

Among the most important criticisms of the Kyoto Protocol was that which considered the anti-competitive nature of the measures. In other words, it was believed that the differences between the Annex I countries and the developing countries were not correct from an economic point of view and that the double track would have given countries not subject to emission restrictions an undue economic advantage. This was also the position of the US, which did not send the signed Kyoto Protocol to the US Senate. Objections, which, in retrospect, would have proved not entirely unjustified.

The sectoral industrial perspective of reconciling climate and energy policies (own-initiative opinion) EESC 2019/927—CCMI/167 545th Plenary Session. July 2019 Rapporteur: Aurel Laurenţiu PLOSCEANU (GR.I-RO) Co-rapporteur: Enrico GIBELLIERI (Cat.2-IT) DG CLIMA—Commissioner responsible ARIAS CANETE states that “… In her Political Guidelines, Commission President-elect von der Leyen announced her intention to introduce a Carbon Border Tax to avoid carbon leakage, which should be fully compliant with World Trade Organization rules”. See also my feedback to the Commission on the carbon border adjustment tax https://​ec.​europa.​eu/​info/​law/​better-regulation/​have-your-say/​initiatives/​12228-EU-Green-Deal-carbon-border-adjustment-mechanism-/​F509815

See on this issue D'Adamo et al. (2020).

EU Commissioner for Economic Affairs Gentiloni, during an event organized by the French government on 23 March 2021 states that “to ensure that the price of imports more accurately reflects the quantity of emissions” will introduce a new tax that “will make the price of carbon equal of European and imported products “and may” incentivize foreign producers to invest in greener production processes and third countries to increase their climate ambition”. See also my feedback to the Commission on the carbon border adjustment tax https://​ec.​europa.​eu/​info/​law/​better-regulation/​have-your-say/​initiatives/​12228-EU-Green-Deal-carbon-border-adjustment-mechanism-/​F509815.

Italian National Agency for New Technologies, Energy and Sustainable Economic Development.