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Can a tax on plastics and carbon fund the European Union?

Submitted by on 12 Apr 2018 – 09:30

Our planet is approaching a plastic waste tipping point — scientist say that up to 90 percent of seabirds already have plastic in their stomachs. Commissioner Günter Oettinger floated the idea of a plastic tax earlier this year, which was dismissed by the rest of the European Commission. Jonathan Gaventa, Director, E3G, Third Generation Environmentalism, writes about his take on the new proposals

In January 2018, EU Budget Commissioner Günter Oettinger floated a big idea: to fund the EU’s budget through taxes on plastic and carbon pollution, rather than only through member state contributions.

The proposals speak to the biggest challenges of our age.

Avoiding the most catastrophic climate change scenarios and keeping global warming to well below 2 degrees requires full decarbonisation of the economy by the middle of the century. The accumulation of plastic waste in the ocean is rightly recognised as a crisis with severe consequences for both wildlife and the food system. The need to move from a throw-away society to a ‘circular economy’ is the widely cited aim of both businesses and governments alike.

There are strong reasons to support the proposals. Pollution from plastics and carbon are classic ‘environmental externalities’. They cause costs to the environment and society that are not fully reflected in market prices. Taxation of plastics consumption and of carbon pollution are making these hidden costs more visible.

Shifting the burden of taxation from labour to pollution can support productivity gains and also address environmental problems.

Fundamentally, it is sensible to take a European approach to these issues. Goods, services and energy are traded across the EU. A proliferation of national and local schemes makes trade more complex for both businesses and consumers. Coordinated European action can prevent a race to the bottom of environmental standards.

Conventional wisdom suggests the politics of the initiative will be difficult to navigate. EU member states traditionally tend to prefer to keep direct control of taxation issuesand are wary of handing over revenue streams. The European Commission has proposed various means for raising its own revenues in the past, including retaining revenues from carbon taxation, but has hardly been successful.

It is also unclear how much support these ideas have within the European Commission itself. The flagship EU plastics strategy contained merely a fleeting reference to exploring the possibility of a plastics tax.

The EU has only recently completed a drawn-out reform of its Emissions Trading Scheme, so appetites for reopening the legislation will be limited. Meanwhile, the response of the plastics industry has been predictably dismissive.

But we are not living in normal political times. The UK’s departure from the EU leaves a multi-billion euro hole in the EU budget that has to be filled. New demands on the EU budget, such as migration, security and disaster response, will also need to be funded. Faced with a choice of increasing national contributions to the EU budget or allowing an EU levy on plastics and carbon, national finance ministers may prefer the latter.

As a result, this is the right time to put forward big ideas on EU budget reform, and the proposals stand a considerably greater chance of success than in previous budget cycles.

If political backing can be secured, there are substantial policy design challenges that will need to be addressed.

The price of carbon allowances in the EU’s Emissions Trading Scheme has fluctuated wildly since it was first introduced, from €30 to below €4 per tonne. This makes it very difficult to predict the potential revenues from the scheme over a seven-year period. Current prices remain far too low to incentivise low carbon investment. A carbon ‘floor price’may be needed to stabilise revenues and ensure targets are met.

Revenues from a plastics tax may be equally unpredictable. If the tax is successful in discouraging plastics use, revenues fall. These effects need to be planned in from the outset. Decisions will still be required on whether plastics are taxed at the point of manufacture, the point of sale or the point of disposal. Adjustments may be needed to ensure the burden is not disproportionately met by poorer consumers or poorer countries.

Finally, in order to be successful, carbon and plastics taxes need to be part of effective and consistent strategies, rather than stand-alone measures. We need to travel a considerable distance to ensure that the EU budget matches our climate goals. While the current EU budget aims for 20 percent of its expenditure to be climate-related, it also funds contradictory investments such as fossil fuel infrastructure.

Wider reforms aimed at increasing investment in clean energy and industrial transformation will need to progress alongside the EU Emissions Trading Scheme. Success in limiting single-use will require not only taxing plastics but also investments in research and innovation and in retooling the industry towards a circular economy model.

Ultimately, the new proposals add useful tools to the European toolbox for the shift to a sustainable economy and deserve full consideration as a result.