How to Make the Polluter PayECONOMIC INCENTIVES AND DISINCENTIVES ARE AT THE HEART OF THE EU'S ENVIRONMENTAL STRATEGY, WITH MEASURES RANGING FROM THE GREEN DEAL TO THE REVISION OF THE EMISSION TRADING SYSTEM AND THE CARBON BORDER ADJUSTMENT MECHANISM
by Edoardo Croci, Director, SUR Lab, Bocconi University
Translated by Alex Foti
The Treaty on the Functioning of the European Union, which entered into force on 1 December 2009, at art. 191 places the "polluter pays" principle at the basis of European environmental policy, together with the principles of precaution, preventive action and correction of environmental damage at the source.
The principle, introduced in 1972 by the OECD, attributes responsibility for damage to the environment to polluters and achieves the internalization of environmental externalities, which are thus reflected in the price of products. Economic instruments are particularly suitable for this purpose, correcting market failures through the introduction of incentives and disincentives of a predominantly fiscal nature, which can be designed in such a way as to achieve high degrees of effectiveness and efficiency. In this context, the European Union and the national states have developed a complex, and not always coherent, framework for the use of economic instruments for the environment in different domains. With the launch of the European Emission Trading Scheme (ETS) in 2005, the latter has become the main tool for implementing the increasingly ambitious EU objectives of decarbonization of the economy, although it has required a number of adjustments to pay remedy to the initial overallocation of emission rights and the effects of the Covid 19 crisis.
The Green Deal, which constitutes the overall and integrated vision of environmental and climate policy adopted by the current European Commission, confirms and strengthens the role of economic instruments. The Communication on Business Taxation of the 21st century, COM (2021) 251 final, recognizes the importance of the tax system to support the green transition and achieve the objectives of the Green Deal, taking also into account the social impacts for the purposes of a just transition. The evaluation of the potential regressive effects of environmental taxation, together with the reuse of fiscal revenues to pay for environmental subsidies, thus constitutes a key element of the European approach.
In turn, the Integrated National Energy and Climate Plans (PNIEC, the Italian acronym) recently presented by national states, with a view to their final approval in June 2024, provide for economic incentives and disincentives to make a decisive contribution.
The Fit for 55 policy package, presented by the European Commission in July 2021, integrates a set of measures across various sectors with the aim of achieving the objective of reducing climate-changing emissions by 55% by 2030 and achieving climate neutrality by 2050. In the wide range of policy instruments employed, a primary role is entrusted to fiscal and economic tools.
Furthermore, the reform of the ETS should come into force for a faster reduction of the emissions cap, from the current 2.2% per year to 4.3% in the 2024-2027 period and to 4.4% in the 2028-2030 period, and with an overall reduction in emissions by 2030 compared to 2005 ranging from -43% to -62%. In addition to the emissions by the electricity and heat production sectors already being regulated, as well as energy-intensive industries and aviation (limited for now only to internal EU flights), the scheme is forecasted to be gradually extended to maritime transport starting from 2022, and a new separate emissions trading scheme for the emissions caused by buildings and road transport is envisaged: it will be applied upstream to fuel distributors, with reporting obligations starting from 2025, to become operational starting from 2026. In the new system all emission rights would be assigned on an auction basis.
Finally, in parallel with the elimination of free emission rights hitherto attributed to energy-intensive sectors, there is the introduction of a Carbon Border Adjustment Mechanism to avoid carbon leakage, i.e. the transfer of emission-causing productions to non-EU countries. The mechanism will be gradually introduced from 2023 with reporting obligations, and from 2026 with the effective regulation of importers of highly energy-intensive products. The amount of the tax is variable, based on the carbon price of the importing country, so as to equalize the burden of carbon prices to which are subjected goods produced in Europe, in order to create a level playing field and comply with the standards of the World Trade Organization.
A portion of the revenue generated by these instruments will go to the Climate Social Fund to be reinvested in the transition to favor those, both businesses and families, bearing the heaviest cost. The aim is to increase the competitiveness of the European economy and improve the environment at the same time.