Following the adoption of the bold energy package at the Spring European Council, the European Commission has just launched a debate on the further use of Market-Based Instruments (MBIs) to support environment and energy related purposes.

At the Spring European Council, the EU-27 heads of state agreed on a set of very ambitious goals in the area of energy and climate change, particularly on a legally binding objective to meet 20 per cent of their energy needs with renewables, such as wind power, in a fresh drive to put the EU on a low-carbon economy by 2020.

They also agreed to achieve at least a 20 per cent reduction of greenhouse-gas emissions by 2020 (30 per cent if other countries outside the EU agree on similar goals). These targets are significantly higher than the eight per cent overall target that the EU agreed to reach by 2012 under the Kyoto Protocol.

This Green Paper is a joint project by Environment Commissioner Dimas and Taxation Commissioner Kovács, in association with Commissioners Barrot and Piebalgs. It seeks to stimulate a broad public debate on how taxes, tradeable emissions rights and other-market based instruments can be used more widely and effectively for environmental and energy policy purposes at Community and national level, as they take into account the hidden costs of unsustainable behaviour and production.

The EU has increasingly favoured economic or market-based instruments for such policy purposes since they provide a flexible and cost-effective means for reaching given policy objectives. Other important MBIs are also implemented by the EU in the framework of the Common Agricultural Policy, through the agri-environmental measures of the Rural Development Policy and under the Cohesion Policy actions in the environment and energy sectors. MBIs have also been advocated in the EU’s sixth environment action programme and the renewed EU Sustainable Development Strategy as well as in the renewed Lisbon Strategy for Growth and Jobs.

MBIs are considered to be the right tool to correct market failures in a cost-effective way. By the term market failure, we refer to a situation in which markets are either entirely lacking or do not sufficiently account for the true or social cost of economic activity.

Hence, in such situations, public intervention is justified, either through MBIs or else through regulatory or market approaches. MBIs however have the advantage of using market signals to address market failures. On the other hand, the use of MBIs may give rise to concerns about their distributional impact when they lead to a price increase, in two ways: the impact on the distribution of income between households and the impact on the international competitiveness of companies or industrial sectors. But one should not forget that if alternative instruments – such as regulation – are applied, these too will have distributional consequences.

Given the advantages of the adoption of MBIs, such as the improvement of price signals, greater flexibility for industry, thereby giving firms an incentive and supporting employment, this Green Paper examines how these tools can be further promoted especially in energy use, the impact of transport on the environment and in other specific areas of environmental policy such as sustainable management of water, waste management, protection of biodiversity and reduction of air pollution to possibly reach the targets formulated during the last European Council in a more cost-effective way rather than through direct legislation.

Of particular importance in this Green Paper is the proposal to shift tax burdens from labour to environmentally-damaging activities. The EU says that it is strongly and equally committed to ensure both environmental sustainable development and the promotion of growth and the jobs agenda. Thus, an environmental tax reform (ETR) which shifts the tax burden from welfare-negative taxes (for example, on labour), to welfare-positive taxes (like levies on environmentally damaging activities such as resource use or pollution), can be a win-win situation to address both environmental and employment issues. The Green Paper also suggests the creation of a new forum that could encourage and facilitate exchanges of experience and best practice between Member States on the use of MBIs and coordination of national approaches as well as national experiences with environmental tax reforms.

Among the other important challenges highlighted in this Green Paper are how the EU can get rid of environmentally harmful subsidies, how the current Energy Taxation Directive can be reviewed and streamlined with new energy and environmental objectives, and how the use of market-based instruments can be combined with the EU emissions-trading scheme.

Through this Green Paper, the commission is seeking reactions from other EU institutions, member states and all stakeholders and the public with regard to the ideas and questions brought forward, and is trying to generate discussion about a more active contribution of EU MBIs to these objectives especially with regard to indirect taxation.

The Green Paper may be viewed at: http://ec.europa.eu/

taxation_customs/resources/

documents/common/whats_new/

COM(2007)140_en.pdf.

Reactions to the consultation should be sent to

[email protected] by 31 July 2007.

More information is available from Forum Malta fl-Ewropa on telephone 2590-9101 or e-mail:

[email protected]

Ronald Mizzi is a research analyst at Forum Malta fl-Ewropa

[email protected]