Work Package 1: Theoretical Background
Description
Work Package 1 built the theoretical framework for the CATs project and consisted of three tasks:
- A survey of the economic literature on energy and emission taxes was carried out.
- The legal aspects of carbon taxation were elaborated.
- A set of criteria for the assessment of carbon taxes in EU Member States in Work Package 2 and Work Package 3 was developed.
Carbon Taxes in Economic Literature
The theoretical economic literature on energy and emission taxes was reviewed. This review focused on theoretical recommendations regarding the optimal design of carbon taxes, their performance relative to other instruments (in particular emission trading systems) and potential interaction effects. The general effects of carbon taxes on economic growth, employment, distribution and innovation were discussed.
Legal Perspective on Carbon Taxes
A survey of the legal literature was carried out, including a discussion of the various legal definitions and concepts of environmental taxes, fees, charges and levies. It comprised the legislation that provides for a legal justification for levying carbon taxes as well as how to deal with multiple environmental policy instru-ments and multiple regulation problems. Other issues investigated relate to who should pay the tax (the taxable subject), on what (taxable object), and on the applicability of relevant European law (e.g. state aid rules).
Criteria for the Systematic Assessment of Carbon Taxes in the EU
Criteria for the systematic assessment of carbon taxes were identified. The list of criteria was developed based on the work in the preceding tasks as well as a survey of the relevant literature and was validated in an expert workshop.
Results and Conclusions
Carbon Taxes in Economic Literature
The long lasting discussion of environmental taxation in economic theory is mainly concerned with the internalisation of negative externalities, the main rationale being the adjustment of prices that reduces environmental externalities while still delivering economically efficient and equitable results. Following the work of Pigou (1920) the tax ought to correct the difference between the private and social cost thus resulting in an internalisation of a negative externality and a subsequent reduction in the detrimental activity. However, as the social cost of pollution for instance is difficult to determine other approaches have been developed for setting a tax rate like the standard price approach by Baumol and Oates (1971). Accordingly, the tax rate is set at a level that guarantees that a certain environmental standard is obtained.
Furthermore, economic debate in the last decades centred around the notion of a double dividend, i.e. non-negative or positive economic effects in addition to environmental improvements that could be generated by revenue-neutral environmental taxation. Key to the realisation of positive economic effects is the use of tax revenues. Revenue recycling offers the opportunity to lower other distortionary taxes, like payroll taxes, thus altering relative input prices and contributing to increased labour demand. Recycling is a key aspect of the concept of ecological tax reforms. It is also of relevance with respect to other points of discussion, i.e. the potential negative effects of environmental taxes on income distribution and international competitiveness. These impacts can be mitigated by targeted approaches to revenue recycling either via lowering labour related taxes or funding environmental investments and R&D.
The working paper on legal perspectives on carbon taxes is available for download here:
Legal Perspective on Carbon Taxes
The overview of the legal aspects to the design of a carbon tax shows that many different aspects have to be taken into account in designing a carbon tax, both in respect of legal instruments to be used (tax, levy or fee) and the actual design of the tax.
Taking a legal perspective, it is added to the design issues mapped by the OECD (2011) that:
- multiple pricing, either by multiple instruments or through carbon taxes or other fiscal charges levied by different (tax) administrations (e.g. two countries or two levels of government) should be prevented;
- legal principles – legality, equality, legal certainty, legitimate expectation, fair play, public trust in tax administration, good faith, transparency, proportionality, non-retroactivity and estoppel – and the economically oriented OECD Ottawa Taxation Framework principles – neutrality, efficiency, certainty and simplicity, and effectiveness and fairness – should be taken into account;
- it should be clear who is taxed (the taxable subject also referred to as taxpayer), what is taxed (the tax base), what exemptions are provided (tax incentives) and what the costs to the polluters will be per unit of pollution generated (tax rate);
- the differences in legal implications of referring to the fiscal measure as a tax, a fee or a levy should be considered;
- adding the adjective “environmental” to the name of the tax may have legal implications, as this may imply that revenue is earmarked for environmental purposes;
- in order to achieve the environmental goal it is of utmost relevance that the taxable event is consistent with the tax base;
- in time there should be only predictable changes to the law thus providing legal certainty, legitimate expectation and trust in tax administration;
- European law influences the design of carbon taxes in that the minimum requirements of the Energy Tax Directive and the Excise Directive must be met and the tax should not contain elements that might be prohibited state aid.
The working paper on legal perspectives on carbon taxes is available for download here:
Criteria for the Systematic Assessment of Carbon Taxes in the EU
From the comprehensive literature review a list of quantitative and qualitative indicators was derived, that can be used in the evaluation of energy and carbon taxes. The list of evaluation criteria is available for download:
