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Geert Woltjer, Marius Hasenheit, Vasileios Rizos, Igor Taranic and Cristian Stroia

One of the fundamental causes of environmental and resource use problems are unpriced scarcity and perverse subsidies. The logical solution seems to be to correct perverse subsidies and to price goods that were unpriced through taxes or otherwise. These measures would also improve the government budget that may be used to reduce distorting taxes and invest in the green economy or for social purposes. In practice the adjustment process of taxes and subsidies is very slow, while at the same time a large number of policies for greening the economy would have been much cheaper and more effective if prices were right. Why is there so much resistance to do what seems to be logical from an economic point of view? This chapter attempts to answer these questions by analysing green taxation policies and discussions in the Netherlands, Germany and the UK as well as by comparing the dynamics in these countries. One conclusion is that we have to be very careful with indicators like the share of environmental taxes in the GDP, because classification is not consistent and because the taxes may not give incentives for greening the economy. In all three countries, the tax on energy has many exemptions that are sometimes used as a reward for making green agreements with governments. Third, coal in electricity production kept its privileges in Germany and the Netherlands in exchange for an agreement, while the UK introduced carbon taxes for coal, in practice forcing companies to close down coal-based electricity production. International competiveness, distributional issues and fear for stranded assets seem to be the main drivers against the consistent use of green taxation. Other issues are the administrative burden, enforcement problems and perception on the effectiveness of taxes. In cases where environmental taxes are explicitly related to labour tax reductions, people are generally not aware of this. In many cases the environmental taxes are relatively complex, such as for example in the UK where it is almost impossible to calculate the final tax people pay on energy use. Designing a lucid and consistent tax system is therefore crucial. A large number of exemptions does not fit into this. The European Emission trading scheme (ETS) creates an extra problem for green taxation, because a reduction in pollution in one country will be offset by more pollution in another country, except when the excess quota is taken out of the market.

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Sixtine Van Outryve d’Ydewalle and Sébastien Wolff

In the face of the necessity to drastically change our natural resources production and consumption, there is a need to open the political imagination for mixing smart instruments. In addition to classical environmental taxes, the ‘extraction taxes’ proposed in this chapter would, on the one hand, allow for an important reduction of fossil resources supply on energy markets, and, on the other hand, raise revenues from common resources to support innovative ecological projects. Therefore, this chapter aims to explore the possibilities of (1) innovative taxation and (2) innovative income allocation to reverse this existing trend. First, the chapter discusses the possibility of implementing a tax on fossil resources extraction, creating a ‘third dividend’ in the current tax law framework. This tax income could come from licencing the extraction of or directly from selling the fossil resources to the consumer, and could therefore be added to the double dividend classically recognised with environmental taxes (reduction of negative externalities and tax incomes). To this end, the chapter will analyse the legal framework surrounding the implementation and allocation of revenues coming from an ‘extraction tax’, focusing on practical and legal limits that States would encounter under European law. Second, this chapter proposes to magnify the effect of such ‘third dividend’ from ‘extraction taxes’ to reduce CO2 emissions by allocating these tax revenues to low-carbon social innovations. Indeed, the reasoning underlying this governance tool that is taxation will be put into question in the light of the necessity to switch from a paradigm of ‘heteroregulation’ of individuals to one of human autonomy in order to increase environmental-friendly behaviours. To this end, take a glimpse of the existing ecological innovations already undertaken by citizens through two existing bottom-up initiatives: a community-led renewable energy project in Denmark and a town gathering a myriad of local low-carbon resilient initiatives in the United Kingdom. It is our view that mixing top-down instruments with bottom-up tools could constitute smart instrument mixes capable of galvanising the ecological transition towards sustainable societies.

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To incentivise or penalise: an analysis of the proposed carbon tax in South Africa

Carbon Taxes, Energy Subsidies and Smart Instrument Mixes

Lee-Ann Steenkamp

According to the International Energy Agency's World Energy Outlook 2015, South Africa accounted for more than one-third of the total energy-related carbon dioxide (CO2) emissions on the African continent. The same report states that emissions in South Africa are projected to follow a 'peak, plateau and decline' trajectory, largely due to improved energy efficiency and a turn towards renewable energy and nuclear energy. The South African government acknowledges that climate change is a reality and is caused largely by greenhouse gas (GHG) emissions and concentrations in the atmosphere that are anthropogenic. Consequently, towards the end of 2015, the South African National Treasury, after years of public consultation, has proposed a pollution tax, known as the carbon tax. The planned carbon tax is aimed at achieving South Africa's ambitious commitments to reduce GHG emissions by 34 per cent by 2020 and 42 per cent by 2025. It is anticipated that the carbon tax will come into effect in a phased manner, commencing on 1 January 2017 at a marginal rate of R120 per ton of CO2-e. Persons who conduct various activities in the manufacturing, construction, mining and transport sectors will be affected. The carbon tax is intended to serve mainly as an environmental tax that internalises the external damage costs of GHG emissions and contributes to behavioural change. It will likely be implemented with complementary measures, for example a reduction in the electricity levy, as well as other measures to recycle revenue, thereby lessening the impact on businesses. Although this chapter advocates an emphasis on carbon taxation as a key element of any fiscal policy mix to address climate change, there are a number of concerns in respect of the detail of the South African carbon tax provisions that have to be addressed. The main objective of this chapter is to analyse the South African carbon tax proposals. First, the chapter provides a brief background to South Africa's climate change policy. Next, the chapter offers an overview of fiscal incentives aimed at enhancing the uptake of renewable energy in South Africa. Thereafter, the design of the proposed carbon tax is explored, analysing arguments for and against its introduction in South Africa. The chapter concludes with a number of practical considerations.

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Claudia Fruhmann, Andreas Tuerk, Veronika Kulmer and Sebastian Seebauer

Policy implementation and transposition do not take place in a “vacuum”, but are influenced by a variety of surrounding factors, stakeholder agendas and by socioeconomic or institutional boundaries. All factors together are shaping the policy performance. Consequently, understanding a policy’s surrounding context is crucial for efficacious policy transposition and implementation. In this chapter we analyse how policies unfold their performance within a pre-existing system using the example of low carbon technology adoption for mobility and heating demand in Austrian households. By using fuzzy cognitive mapping, for both areas, we find a mainly subsidy-based policy framework often lacking innovative solutions and being strongly influenced by surrounding contextual factors and stakeholder constellations. In particular both cases show that barriers for target achievement in the case of low carbon technology adoption are mainly characterized by uncertainties and individual concerns about future benefits, technology effects or financial burdens. Our findings in combination with lessons learned from Europe-wide best practice examples highlight the importance and benefit of smart policy mixes in future policy design. In particular our analysis reveals that smart policy mixes are more robust and more easily adaptable concerning influences of complex system correlations, thus not only in the case of low carbon technology adoption in Austrian households but also for policy design in general.

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Martina Zahno and Paula Castro

This chapter aims to provide empirical evidence that fossil fuel subsidies present a considerable barrier to the deployment of renewable energy, even in the presence of policies that also subsidize or otherwise support renewables. The empirical relationship is analysed using the example of electricity, by modelling the determinants of electricity generation from non-hydro renewable energy sources, using a large cross-country dataset covering the time period from 2003 to 2013. As non-hydro renewables participation has been zero in many (low-income) countries until very recently, we estimate two-part models. This involves panel binary regressions in the first part to model the probability that a positive amount of electricity from renewables is produced. In the second part, we apply linear panel models to estimate the expected share of renewables, given that it is positive. We found that the likelihood that a country produces any electricity from renewables at all is positively related to the existence of policies that support renewables deployment, but does not seem to be related to fossil fuel subsidies. In cases where countries already produce grid-based electricity from renewable sources, we find significant evidence between-country effects for fossil fuel subsidies and financial support policies. Hence there are indications that the contribution of non-conventional renewables to electricity generation is negatively related to higher than average per capita levels of fossil fuel subsidies but despite this, financial support policies do make a positive difference in cross-country comparisons of renewable electricity shares.

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Preface

Carbon Taxes, Energy Subsidies and Smart Instrument Mixes

Edited by Stefan E. Weishaar, Larry Kreiser, Janet E. Milne, Hope Ashiabor and Michael Mehling

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Marta Villar Ezcurra and Enrique Fonseca Capdevila

In Europe electricity networks must now be operated by separate entities from the suppliers of electricity. The importance of these entities is crucial: they influence the distribution of costs that can impact the electricity prices and they play a significant role in the allocation of the system’s costs to the different types of consumers. Although there are common structures across the EU, many variations still exist in the legal organization, regulatory policies and pricing schemes. While MBIs are involved in the use of the general electricity networks must be in compliance with the State aid law, this chapter aims to review the parafiscal charges, fiscal instruments and other contributions to the electricity networks implemented in the EU Member States. This is to clarify its categorisation under the scope of the Energy Taxation Directive (directive 2003/96) and with regard to EU State aid regime. To this end, the legal framework is considered in the light of settled ECJ case-law.

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Linking carbon tax systems under the Paris Agreement: potentials and risks

Carbon Taxes, Energy Subsidies and Smart Instrument Mixes

Nicolas Kreibich and Hanna Wang-Helmreich

With the adoption of the Paris Agreement in December 2015, a new framework for international climate policy was created. Article 6 of this global agreement provides the basis for transferring mitigation outcomes across national borders, inter alia, by linking carbon pricing instruments. While linking of Emissions Trading Schemes (ETS) has already been studied to a wide extent, linking carbon taxes to other systems has until now received little attention in the literature. In light of the fact that a growing number of countries are introducing carbon taxes, this can be considered a serious knowledge gap. This chapter aims to fill this void by highlighting the potentials and risks of linking carbon tax systems with other carbon pricing instruments across national borders. The authors show that the linking of carbon tax systems can lead to significant climate integrity risks, potentially resulting in a net increase of greenhouse gas (GHG) emissions. The authors highlight different options as to how these risks can be addressed by making use of the new structure that has been established with the Paris Agreement. They conclude that the potentials and risks of linking carbon taxes with other carbon pricing instruments should be carefully analysed before such a link is established, as environmental integrity risks in particular can be considerably high.

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Landscape and taxation: the “minor” instruments

Carbon Taxes, Energy Subsidies and Smart Instrument Mixes

Silvia Giorgi

The chapter aims at setting up the legal notion of environment in such a way to include landscape and to consider as a unicum the harmonious integration of urban development and what surrounds it. On this basis, taxes and para-fiscal levies implementing the relationship between urban contexts and environment are analyzed, focusing on “minor” measures such as road pricing, vehicle taxes, tourist taxes – urban perequative instruments.

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Is the use of carbon offsets in the South African carbon tax a smart mix?

Carbon Taxes, Energy Subsidies and Smart Instrument Mixes

Memory Machingambi

Analyses have shown that a carefully designed policy package, with the carbon price at the centre, can reduce emissions at a significantly lower social cost than any single policy. In policy packages with a carbon tax, the major integration concern is ensuring cost efficiency and avoiding policy redundancy. A typical package of climate policies would include carbon pricing to incentivise emission reductions, policies for developing, deploying and reducing the costs of new technologies and policies to address non-price barriers. For South Africa, a pricing instrument in the form of a carbon tax will be combined with a carbon offset scheme which allows companies to cost effectively reduce their tax liability by 5 to 10 per cent of their total emissions. Only activities or sectors outside the tax net, projects implemented in South Africa and not listed on the negative list are permissible as carbon offset projects under the carbon tax scheme. Allowing companies to develop carbon offset projects in activities or sectors not covered by the carbon tax is premised to incentivise mitigation in sectors or activities not covered by the carbon tax. Will the flexibility of allowing carbon offsets to be traded between the project developers and carbon tax paying entities establish a mini emissions trading scheme (ETS)? Is the carbon tax going to act as a maximum cost or minimum price of trade equalising costs across participants hence limiting the overall cost of the policy? This chapter will examine scenarios on how the built-in flexible arrangement or instrument mix of using carbon offsets within the carbon tax will work to enhance emissions mitigation overall in the different activities and sectors. Are there benefits (emissions and costs) to having a combination of the carbon tax and carbon offset flexibility mechanism or not? Could these evolve and influence the instrument choice beyond the first phase of the carbon tax i.e. updating the policy design (policy recalibration) to allow one or both instruments to adapt to the abatement delivered by the other instrument in the package?