A Carbon Tax to Fight against Global Warming

Roberto Palea
Member and former President of the Centre for Studies on Federalism

Alberto Majocchi
European Budget and Sustainable Growth - The Role of a Carbon Tax, Brussels, P.I.E. Peter Lang, 2018

Alberto Majocchi’s most recent work, European Budget and Sustainable Growth – The role of a Carbon Tax, published by Peter Lang, in the series “Federalism”, edited by the Centro Studi sul Federalismo, consists of two parts.

The first, on fiscal policy in the European Union (EU), critically and clearly illustrates, the complex rules and structures of the monetary union as well as the active policies that the EU should have and must put in place to stabilize the European economy, directing it, at the same time, towards economic and social development.

The other part of the work, a direct consequence of the first, highlights the inadequacy of the financial resources made available to the EU Budget (Multiannual Financial Framework 2014-2020), which are absolutely not up to the requirements of the aforementioned active policies that the Union must implement to get out of its current crisis and decline, aimed at the production of public goods and services capable of boosting growth, reducing unemployment, improving the welfare state and responding to the challenges of internal and external security of the European continent.

The author, starting from the legislation of the Maastricht Treaty, traces its implementation up to the Fiscal Compact. There is a need to impose quantitative limits on the size of the annual deficit of each Member State of the Monetary Union; limits which, inevitably, must be set in all countries with a decentralised tax structure.

The Eurozone was founded on the principle of maintaining price stability through the European System of Central Banks. To respect this principle, it is essential that the debt created by a State not be borne by the European Central Bank, causing it to print new money.

This objective would justify the European Union’s strict controls, if it were to reach a federal structure, on the budgets of the Member States of the Monetary Union. As a result, Member States are must aim for a balanced national budget with the necessary rigour.

With the approval of the Fiscal Compact, the Eurozone has, therefore, made an innovative choice compared to the experience of the past: growth is not achieved by creating new debt. Having said that, it is now recognised that austerity measures, however necessary and unavoidable they may be, are insufficient to resume the economic development that will keep Europe among the industrialised and advanced countries. At the same time, there is a consensus that this development must be compatible with environmental protection.

According to Majocchi, in Europe, the initiative to launch an expansive policy at European level should consist of launching a European Fund for Development and Employment.

The revitalisation policy that should be implemented by the Fund is new and different from traditional policies, as it reconciles growth and environmental protection. In line with this choice, the Fund will have to devote its resources to financing investment in research and development, to develop human capital and to producing common assets that are capable of ensuring sustainable growth and increasing productivity and, as a result, the competitiveness of the European economy. Only in those areas, linked to research, innovation and improvement of the quality of life, will it be possible to create new jobs and abate unemployment.

But the Fund is just an intermediate objective, with a view to achieving consensus in the Eurozone countries on how to use the proceeds of a tax on financial transactions and, in the future, of a Carbon Tax to finance an additional Eurozone budget, managed by a European Treasury, responsible for implementing the sustainable development plan and coordinating the economic policies of the member countries.

Initial awareness of this problem by the European Union came with the launch of the Juncker Plan, which was a turning point, since it confirms that the Commission considers a fiscal shock to be necessary to support investments, in parallel with the ECB’s efforts in the monetary field.

But the Juncker Plan has some flaws. First, it does not put additional resources on the table. There is also a governance problem, as the choice of investments and the distribution of benefits among the Member States requires a political choice, which cannot be assigned to the European Investment Bank.

Majocchi concludes that it is impossible to implement the investment policies necessary for growth and the defence of European welfare without addressing the problem of the new resources needed, an issue to which he dedicates, as mentioned, the second part of his book.

According to the author, the financing of the European budget must also be based on new sources of funding. These sources, as a whole, should be made up of:

• The Financial Transaction Tax (which has increased considerably in recent years), introduced at European level with common rules, to avoid its circumvention and exclude competition between the Member States.
• The Value Added Tax, constituted as a resource of the EU Budget for a part of its total revenue, thus making the overall amount of expenditure for consumption of goods and services in the entire Eurozone transparent at European level;
• the Corporate Income Tax, which requires the definition of a minimum level of taxation to avoid tax competition between States, which has distorting effects on market efficiency;
• the Digital Tax, which involves the taxation of income generated by the digital economy not on the basis of the residence of the company but on the amount of income generated by the sale of its services in each European State.
• The Carbon Tax, which Majocchi proposes to apply in Europe, is based on the emissions of CO₂ and climate-changing gases into the atmosphere of each fossil fuel. The author solves some significant theoretical problems here.

The first problem, which environmental economists have been discussing for years, concerns “carbon pricing”, i.e. the problem of internalising the cost of the pollution it generates into the price of the fossil fuel itself.

The application of a tax with a rate that depends on the quantity of gas produced by the different fossil fuels (from coal, to diesel, to petrol, to methane gas, to shale gas, etc.) solves the problem at its source, with a tax on the consumption of the respective fuel.

The Carbon Tax as described is the simplest lever to reduce the emission of CO₂ and greenhouse gases into the atmosphere, correcting the well-known market failure in defending the quality of the environment. At the same time, it ensures that the EU receives very substantial tax revenues for financing certain public services and goods in the interest of the community.

Also according to Majocchi, the EU should create a European Agency for the Environment and Energy, set up according to the model of the European Coal and Steel Community (ECSC) of 1951, with supranational powers and adequate financial resources. With a high degree of autonomy and under a single direction, it would be possible to implement effective policies to reduce polluting emissions and develop renewable energies in order to achieve the Union’s energy self-sufficiency goal. At the same time, it would be possible to promote partnerships with African countries and companies, aimed at developing energy infrastructures in these solar-rich countries, to promote their endogenous economic development. This solution would also ease migratory pressures, rooting the population in its territory.

The second problem that the author solves is the feared loss of competitiveness of countries that apply the Carbon Tax compared to all others, as this tax increases the cost of goods and products and therefore makes them less competitive on the international market.

To avoid these competition distortions Majocchi proposes to apply the same Carbon Tax at the external border of the Union on imports of goods and services from countries where there is no such tax.

President Macron also said that “a carbon border tax is indispensable”. The revenue from this carbon tax collected at the border could flow directly into the proposed European Environment and Energy Agency.

Given current times, it should be noted that it would be difficult for the Eurozone countries to accept, now, to send the entire revenue of the Carbon Tax received within their countries to the aforementioned European Agency for the Environment and Energy.

A part of the Carbon Tax would, therefore, be collected at the national level. The national carbon tax, applied with the same criteria by all EU Member States, would reduce taxation on business and labour income (by cutting the tax wedge) and provide the Agency (which is also authorised to borrow on the market) with substantial contributions from the Member States to finance joint activity.

The third value of the author’s proposal is that, if realized, with its simple and linear mechanism, the Carbon Tax would set an example and a model for the whole world.

In my opinion, it is no coincidence that a host of leading US economists (in another part of the magazine there is their statement on the carbon dividend) are taking a clear and clear stance on the application of a carbon tax within the United States and that this proposal is in many ways similar to that of the European federalists.

In conclusion: Alberto Majocchi’s work summarizes his scientific work with foresight and coherence, at least since the publication of the well-known and appreciated 1993 Delors Plan on growth, competitiveness and employment (to the drafting of which Majocchi actively contributed). Today, it sets out clearly and in detail the instrument it needs to enable the EU to maintain its leading position both in industrial and social development and in the fight against global warming.