The European Commission´s approach towards the use of economic instruments in environmental policy Joint CAFE/NEBEI conference “Policy instruments to reduce air pollution” 11/12 November 2004, Brussels Manfred Rosenstock DG Environment, European Commission The views expressed in this presentation are those of the author and may not in any circumstances be regarded as stating an official position of the European Commission

Environmental policy in the EU Traditional instrument of Community environmental policy: technical regulation, in particular the setting of standards. Commission approach: Expand the use of economic instruments within instrument mix, such as environmental taxes, emissions trading and incentives. => 6th EAP and SD Strategy. Focus of Community activity so far energy-related but some provisions on MBI in other environmental directives: packaging, water, batteries.

Choice of policy instruments Economic instruments efficient means to curb pollution: static and dynamic efficiency. Environmental taxes also provide revenues to cut other, more distorting taxes => “double dividend” argument. Optimum solution in many cases policy mix of various MBI, or MBI with legislative or non-legislative instruments.

Overview Types of environmental taxes in Member States Directive on Energy products taxation State aid control and environmental taxes Directive on GHG emissions trading Forthcoming communication on promoting the use of MBI in environmental policy Possible future developments

Types of environmental taxes in Member States Source: EEA 2001, excerpts

Directive on energy products taxation Not a new tax but framework of rules to restructure and harmonise national tax systems. Increase in minimum tax rates on mineral oils beyond the rates agreed in 1992 (roughly reflects cumulated inflation). Second step increase only for Diesel in 2010 Include new products: coal, lignite and natural gas, electricity; each with minimum rates. Rules apply since 1 January 2004, for new Member States since accession. Mineral oil tax directive of 1992 repealed. Transitional periods for some MS on some products.

Minimum tax rates

Tax rates on diesel fuel in Member States (in January 2004)

State aid control and environmental taxes Tax exemptions/reductions for energy-intensive companies, which are allowed under the directive, usually are State aid. Examination by the Commission under EU Treaty (Art. 87). Assessment on the basis of Guidelines on State aid for environmental protection. Acceptable when no disproportionate effect on competition. For tax exemptions/reductions for competitiveness reasons, this means that usually approved if limited in time and balanced by environmental benefits, e.g. through voluntary agreements.

Directive on GHG emissions trading Objective to limit GHG emissions in the EU in line with Kyoto protocol and EU burden sharing targets. Directive covers emission trading within the EU. Directive on Kyoto project mechanisms (JI and CDM) will open up additional opportunities for cost-effective measures to reduce GHG emissions. System to come into force in 2005. Warm-up phase until 2007, then Kyoto phase 2008-12. Initially only covering CO2-emissions in five sectors, but review clauses.

Directive on GHG emissions trading Almost all MS have submitted allocation plans to Commission for assessment Decisions taken on two thirds of all NAPs. Allocation creates scarcity and thus determines price of allowances. At least 95% allocation free of charge in warm-up phase and 90% in Kyoto phase. MS decides on split of burden-sharing target between trading and non-trading sectors and has to introduce policies and measures for non-trading sectors.

Other Commission proposals on MBI to control atmospheric emissions Proposal for regulation on phasing out of HFC-134a from mobile air conditioners via transferable quota system to minimise compliance costs. Declining quota over time by car manufacturer. Bonuses for early action. Industry and EP in favour of traditional type approval approach for phasing out. Most MS agreed and averaging, banking and trading provisions taken out of political agreement. Similar experience with proposal for emissions from non-road machinery.

Communication on the use of MBI in environmental policy 1997 Commission Communication on environmental taxes and charges analyzed existing rules . Recently, types of MBI used by MS have become more varied and are increasingly used in combination (policy packages) which are affected by different sets of Community rules: Taxation, State aid, emission trading, internal market. Thus scope of new communication to be widened to include CO2 emission trading scheme and guidelines on State aid for environmental protection. Analysis of ways forward in the light of institutional constraints: Unanimity rule for all taxation-related initiatives vs. Qualified majority for emission trading.

Further steps – emission trading First reports by MS on functioning of system in 2005. Commission review report in 2006. Looking e.g. at monitoring mechanism, transaction costs, international developments. Question whether need for further harmonisation – conclusions from assessment of NAPs. Possibility for extension of scheme to other sectors? Dialogue with other countries on linking of ETS. Discussions about ETS in other sectors: NL do for NOx, UK for packaging waste. COM will analyse and see whether scope and need for Community action.

Further steps – taxation Proposal on treatment of those entities that fall under both ETS and energy taxation, in preparation. Separate Commission proposal on taxation of fuel used by road hauliers (“professional diesel”) since 2002. Proposal on greening of car taxation in preparation. Difficult to reach unanimity but strong interest from a number of MS to advance here. Possible ways out? Enhanced co-operation for those MS that are interested to increase degree of harmonisation. Use of the open method of co-ordination as flexible instrument to reach common objectives.

Further steps – subsidies Review of the State aid guidelines by 2007 in the light of experience since 2001 Reform of environmentally-harmful subsidies (EHS). They reverse efficiency gains from the use of MBI and also stifle environmental innovation. Currently work undertaken by the OECD. On that basis, Commission to enter into a discussion with MS on the issue of reform of EHS.

Further information Studies on Environmental Taxation issues: http://europa.eu.int/comm/environment/enveco/studies2.htm#taxation OECD/EEA database on economic instruments and voluntary approaches used in environmental policy : http://www1.oecd.org/scripts/env/ecoInst/index.htm Information on climate change issues http://europa.eu.int/comm/environment/climat/home_en.htm Electronic version of the State aid guidelines: http://www.europa.eu.int/comm/competition/environment/#state_aid