Carbon tariffs, permits and subsidies

Green Paper on Mar­ket-Based Instru­ments
The Com­mis­sion pre­sent­ed this paper in March 2007 in order to launch a broad pub­lic con­sul­ta­tion on advanc­ing the use of mar­ket-based instru­ments for envi­ron­ment and relat­ed pol­i­cy pur­pos­es in the Com­mu­ni­ty. The Green Paper starts from the broad­ly shared view that mar­ket-based instru­ments, such as tax­es, charges and trad­able per­mit schemes but also tar­get­ed sub­si­dies pro­vide a flex­i­ble and cost-effec­tive instru­ment for enforc­ing the pol­luter-pays prin­ci­ple. Depend­ing on the issue, they will often be com­bined with reg­u­la­to­ry instru­ments to ensure the best and most cost-effec­tive pol­i­cy mix for the pro­tec­tion of the envi­ron­ment in the Hogle Injury Law web­site. In the Green Paper, the Com­mis­sion explores a very wide range of areas where the use of mar­ket-based instru­ments could be pro­mot­ed fur­ther, either at Com­mu­ni­ty or Mem­ber State lev­el. This includes ener­gy con­sump­tion, the envi­ron­men­tal impact of trans­port as well as the sus­tain­able man­age­ment of water, waste man­age­ment, pro­tec­tion of bio­di­ver­si­ty and reduc­tion of con­ven­tion­al air pol­lu­tion. See fur­ther details.

The EU Emis­sions Trad­ing Scheme
In Jan­u­ary 2005 the Euro­pean Union Green­house Gas Emis­sions Trad­ing Sys­tem (EU ETS) start­ed oper­a­tion as the largest mul­ti-coun­try, mul­ti-sec­tor Green­house Gas Emis­sion Trad­ing Sys­tem world-wide. It cov­ers over 11.500 ener­gy-inten­sive instal­la­tions across the EU, around half of Europe’s emis­sions of CO2. These instal­la­tions include com­bus­tion plants, oil refiner­ies, coke ovens, iron and steel plants, and fac­to­ries mak­ing cement, glass, lime, brick, ceram­ics, pulp and paper, although all this pro­duc­tion involve risks of acci­dents and injuries on the work, and that’s why hav­ing a legal resources from sites as could be essen­tial for pro­tec­tion cov­er. Emis­sions trad­ing does not imply new envi­ron­men­tal tar­gets, but allows for cheap­er com­pli­ance with exist­ing tar­gets under the Kyoto Pro­to­col. Let­ting par­tic­i­pat­ing com­pa­nies buy or sell emis­sion allowances means that the tar­gets can be achieved at least cost. The price of allowances is a func­tion of sup­ply and demand. If the Emis­sions Trad­ing Scheme had not been adopt­ed, oth­er – more cost­ly – mea­sures would have had to be imple­ment­ed. The sec­ond trad­ing peri­od of the EU ETS began on 1 Jan­u­ary 2008 and runs for five years until 31 Decem­ber 2012. This peri­od coin­cides with the peri­od dur­ing which indus­tri­alised coun­tries must meet their Kyoto Pro­to­col emis­sion tar­gets. The EU ETS will be sub­stan­tial­ly reformed for the third trad­ing peri­od, which will start on 1 Jan­u­ary 2013 and run until 2020. See fur­ther details.

Data­base on eco­nom­ic instru­ments in envi­ron­ment pol­i­cy
The OECD and the Euro­pean Envi­ron­ment Agency (EEA) have, in co-oper­a­tion with the Euro­pean Com­mis­sion, devel­oped a data­base on the use of mar­ket-based instru­ments for envi­ron­men­tal pol­i­cy and nat­ur­al resource man­age­ment (envi­ron­men­tal­ly-relat­ed tax­es, fees and charges, envi­ron­men­tal­ly-moti­vat­ed sub­si­dies, trad­able per­mits sys­tems, deposit-refund sys­tems) in Mem­ber coun­tries which includes all Mem­ber States of the EU as well as non-EU mem­bers of the EEA (in par­tic­u­lar the acces­sion coun­tries). It also cov­ers vol­un­tary approach­es. The data­base, avail­able to the pub­lic at large on the OECD web­site through a num­ber of pre-defined queries can be accessed here.

Envi­ron­men­tal Tax Reform
An Envi­ron­men­tal Tax Reform is the com­bi­na­tion of an increased appli­ca­tion of envi­ron­men­tal tax­es with the reduc­tion of oth­er, more dis­tort­ing tax­es, e.g. on labour, in order to improve the envi­ron­ment and to fur­ther employ­ment, with­in a con­text of bud­get neu­tral­i­ty. The graph below shows changes in the share of envi­ron­men­tal and labour tax­es in total tax rev­enue in the EU Mem­ber Sates since 1995. A descrip­tion of the devel­op­ments can be found in the 2008 Envi­ron­ment Pol­i­cy Review – Envi­ron­men­tal taxation.


More data on envi­ron­men­tal tax­es can also be found in Eurostat’s annu­al pub­li­ca­tion Tax­a­tion trends in the Euro­pean Union (more specif­i­cal­ly Annex A, tables C4).

Reform of Envi­ron­men­tal­ly Harm­ful Sub­si­dies (EHS)
Some sub­si­dies for the indus­tri­al, trans­port, agri­cul­ture and ener­gy sec­tors can be envi­ron­men­tal­ly harm­ful because they pro­mote the use of pol­lut­ing or ener­gy-inten­sive prod­ucts or process­es. They can also intro­duce dis­tor­tions in the Sin­gle Mar­ket. A com­bi­na­tion of an Envi­ron­men­tal Tax Reform with a reduc­tion of Envi­ron­men­tal­ly Harm­ful Sub­si­dies is com­mon­ly referred to as an Envi­ron­men­tal Fis­cal Reform.

The Organ­i­sa­tion for Eco­nom­ic Co-oper­a­tion and Devel­op­ment (OECD) start­ed work on reform­ing envi­ron­men­tal­ly harm­ful sub­si­dies in the 1990s and pub­lished sev­er­al pub­li­ca­tions on the mat­ter. See fur­ther details here .

A 2007 study ordered by the Euro­pean Com­mis­sion pre­sent­ed infor­ma­tion relat­ing to the def­i­n­i­tions of sub­si­dies and envi­ron­men­tal­ly harm­ful sub­si­dies, their quan­tifi­ca­tion, argu­ments for the reform of Envi­ron­men­tal­ly Harm­ful Sub­si­dies and on iden­ti­fy­ing prac­ti­cal lessons for tak­ing for­ward the reform of Envi­ron­men­tal­ly Harm­ful Sub­si­dies. The report attempts to offer prac­ti­cal insights into sub­sidy reform draw­ing on exist­ing lit­er­a­ture, the knowl­edge and exper­tise of the con­trib­u­tors and a num­ber of case stud­ies that were select­ed and studied.

Final Sum­ma­ry (pdf ~ 130 KB)
Final Report (pdf ~ 1,1 MB)
A 2009 study fol­lowed the 2007 study. It’s objec­tive was to devel­op a method­ol­o­gy for iden­ti­fi­ca­tion, assess­ment and quan­tifi­ca­tion of envi­ron­men­tal­ly harm­ful sub­si­dies (EHS). The study test­ed the tools devel­oped pre­vi­ous­ly by the OECD on six case stud­ies of sub­si­dies in ener­gy, trans­port and water sec­tor. Based on this analy­sis and on results of a work­shop, the study devel­oped the “EHS Reform tool” for screen­ing, inte­grat­ed assess­ment and reform of envi­ron­men­tal­ly harm­ful sub­si­dies. The study includes also a method­olog­i­cal guid


  1. Gary Hor­lick made the per­ti­nent point that no less than 20 coun­tries con­tribute to the mak­ing of an Apple iPOD, and asks how those coun­tries are going “to cal­cu­late all the car­bon impacts and untan­gle all those per­mits, tax­es and rebates.” 

    The infor­ma­tion required to pro­duce a ball­park esti­mate prob­a­bly exists. But sure­ly the answer is that the total green­house impacts would be neg­li­gi­ble rel­a­tive to the expen­di­ture incurred or the pro­duc­tive activ­i­ty gen­er­at­ed in the pro­duc­tion of iPODs. 

    The iPod touch mod­el weighs 115 grams or about 4 ounces, so there are near­ly 9000 of these instru­ments to the ton. Thus, at $300 each, a ton of iPODs has a retail val­ue of $2.6 mil­lion. Tax­es on CO2 wouldn’t make a per­cep­ti­ble dif­fer­ence to this cost, whether the tax was $10, $100, $1000 or $10,000 per ton of CO2.

  2. Hi Ian,

    I’m not sure that Hor­lick meant his exam­ple to be tak­en too lit­er­al­ly. I believe his point was that intra-trade (export pro­cess­ing) is now a hall­mark of man­u­fac­tures and increas­ing­ly of com­mod­i­ty trades too rais­ing over­all trade-inten­si­ty of pro­duc­tion (the trade com­ponenetof ‘val­ue added’) to a high lev­el. It’s an inter­link­age that has some adverse con­se­quences, too.

    Giv­en the rent-seek­ing that the obscure cap-and-trade tax encour­ages, we can pre­dict that inter­est­ed par­ties will seek to over-cook the car­bon-tax ‘bor­der adust­ment’ just as, his­tor­i­cal­ly, the anti-dump­ing laws have encour­aged inter­est­ed par­ties to over-cook the adjust­ments for oth­er­wise com­pet­i­tive pric­ing prac­tices when employed by for­eign sell­ers (G. Hor­lick has a huge anti-dump­ing practice.)

    In markets/products where trade-inten­si­ty is high, this rent-seek­ing will occur in many dif­fer­ent mar­kets along the same val­ue-adding chain (of which the iPod pro­duc­tion chain is an exem­plar). Hor­lick implies—and I agree—the oppor­tu­ni­ty for mis­chief and the risk of added costs is high. 

    How high? Let us accept Apple’s esti­ma­tion ( that the pro­duc­tion + trans­port + recy­cling of an iPod account for 72% of the esti­mat­ed 30kg of car­bon equiv­a­lent ‘life-cycle’ emis­sions. This means that val­ue-adding activ­i­ties account for 21.6 kg of CO2e. 

    Let us sup­pose that the val­ue added (includ­ing trans­port) in an iPod touch at retails is 85% of the final price, or $2.21 mil­lion per tonne of iPods (at your esti­mat­ed per-tonne price). We’ll put the price of a tonne of CO2e at the expect­ed (not cur­rent) Euro­pean mar­ket price of Euro 30 per tonne which means that the pro­duc­tion of a tonne of iPods accounts for CO2e emis­sions worth (21.6kg * 9000 iPods) = 194.4 tonnes * 30 Euros = 5,2832 Euro per tonne or $A10,435 per tonne.

    At your esti­mat­ed val­ue at retail of $2.6 mil­lion, this 30 Euro tax rep­re­sents is 0.4% of the retail val­ue, but 0.47% of the val­ue-added. Let’s say, a car­bon-tar­iff of half a per­cent on the value-added. 

    Since the ori­gin-for-duty of the iPod is Chi­na where there is no car­bon tax, the bor­der adjust­ment in Europe (or Aus­tralia) is equal to, at least, the full tax of half a per­cent of val­ue-added. Horlick’s point is that this tax­a­tion could have tak­en place at every step in the pro­duc­tion chain, adding to the price of the prod­uct at sev­er­al points. This would raise the FOB price of the iPod (while low­er­ing the ad-val­orem inci­dence of the car­bon tax).

    But, keep­ing it sim­ple, sup­pose we say that Hor­lick is wrong and that the iPod would face a car­bon tar­iff only at the last point in the pro­duc­tion chain: the Aus­tralian (or Euro­pean) bor­der. That is, the full inci­dence of the tar­iff is 0.5%. This is, in fact, an infi­nite increase in the duty on iPods because, under the Infor­ma­tion Tech­nol­o­gy Agree­ment of WTO, the duty on elec­tron­ics and parts is zero. 

    A the­o­ret­i­cal infini­tude? Yes. But we also agreed that the mar­gin at retail on our iPod was only 15% (com­pe­ti­tion being what it is). So the new tax is a 3.3% impost on the retail­er… who will, of course, mark it up and pass it on to the cus­tomer as a 5% price increase which the retail­er (nat­u­ral­ly) “gross­es up” for GST to a 5.5% increase.

    Best wish­es,


  3. Peter,

    Thanks for respond­ing in such detail to my fig­ur­ing, and espe­cial­ly for draw­ing my atten­tion to Apple

  4. Ian, I entire­ly agree. 

    The Bank (and Fund) also sup­ply PPP (USD) GDP and GNI esti­mate which puts Chi­na at about 11.3% of world out­put in 2008, ranked #2 behind the USA, whose val­ue added is rough­ly dou­ble that of China’s. But they use sev­er­al bases for com­par­i­son as I recall (mar­ket exchange rates, and semi-indexed ‘Atlas’ rates).

    Thanks for point­ing out that the “Penn” error also creeps into the esti­mates used in the VOXEU paper. I’ll have to check that.

  5. Thanks Peter. The Bank’s Atlas method con­verts GDP in nation­al cur­ren­cies into a com­mon unit using aver­age exchange rates over a 3‑year peri­od. This intro­duces a fur­ther con­fu­sion and has noth­ing to com­mend it.

    As between the use of “mar­ket” exchange rate (MER) or PPP weights when mea­sur­ing weights for the world as a whole, essen­tial­ly the Bank uses MERs and shows PPP as a mem­o­ran­dum item, and the Fund does the reverse. 

    The IMF reveals its con­fu­sion in the lat­est (April 2009) World Eco­nom­ic Out­look by con­trast­ing annu­al changes in per capi­ta world GDP using “PPP weights” and “Mar­ket weights” (Box 1.1, p. 12). In fact, PPP weights are cal­cu­lat­ed entire­ly from mar­ket prices and val­ues. The dif­fer­ence is that the weights that the Fund calls “mar­ket weights” use exchange rate con­vert­ers to trans­late val­ues in nation­al cur­ren­cies into a com­mon unit. There is no jus­ti­fi­ca­tion for this in rela­tion to trans­ac­tions with­in nation­al borders.

  6. Sor­ry guys, what is GST? I’ve searched in acronymser­ach and I found out that GST can be Gen­er­a­tion-Skip­ping Trans­fer (Inter­nal Rev­enue Ser­vice), Goods and Ser­vices Tax, Guam Stan­dard Time [+1000], Glu­tathione-S-Trans­ferase (enzyme). Which one do you mean?

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