The Dutch Carbon Tax illustrates how taxes and emissions trading can be combined. It acts as a top-up to the EUA price, in effect putting a floor on the carbon price. It also has exemptions from the tax which work very like the allocation of free allowances in an ETS.
On the 1st of January 2021 the Netherlands introduced a new carbon tax for industry. The tax mainly applies to emitters covered by the EUETS, but also extends to waste incinerators, which are currently outside the EUETS. The design is similar to the tax in power generation, introduced a year previously.
The tax in effect tops-up the EUA price. If the EUA price is less than the tax, the amount of tax paid is the difference between the tax and the annual average EUA price for the year. For example, if the carbon price is set at €125/tCO2 in 2030, and the annual average EUA price in 2030 is €50/tCO2 a tax of €75/tCO2 is payable. The tax is payable after the year end. If the EUA price is above the level of the tax then no tax is paid. Waste incinerators pay the tax in full.
In this way the tax sets a minimum level for the carbon price (a floor price), but does not prevent the carbon price from going higher if EUA prices are high.
The level of the taxes has been set out from now to 2030 (see chart). For industry the price rises linearly from €30/tCO2 in 2021 to €125/tCO2 in 2030. The taxes are intended to be consistent with the Netherlands’ decarbonisation targets, and their level is subject to review and revision over time to ensure consistency with the targets.
Chart: Carbon taxes in the Netherlands
To give time for industry to achieve emissions reductions there are exemptions from the tax, called dispensation rights. These dispensation rights mean no tax is payable on some proportion of a benchmarked quantity of efficient emissions.
The effect of these dispensation rights broadly resembles free allocation of EUAs according to a benchmark in the EUETS. Both remove carbon costs for a benchmark level of emissions. Unused dispensation rights can be sold to other emitters covered by the tax, but not to intermediaries.
The proportion of benchmark emissions qualifying for dispensation rights, called the reduction factor, falls over time. The reduction factor decreases annually, from 1.2 for 2021 to 0.69 by 2030. Over 30% of efficient emissions will thus be subject to the full carbon price by 2030.
This approach in effect creates a hybrid between an ETS and a carbon tax. In particular it puts a floor on the carbon price, and provides exemptions similar to those achieved with free allocation of allowances, but as part of a a tax mechanism. It illustrates the way in which design of carbon pricing can incorporate similar features in both a tax and an ETS. Debate should focus on features and effectiveness, not on abstract debates about emissions trading vs. taxes.
Adam Whitmore – 22nd January 2021
Thanks to my colleague Christiaan Gevers Deynoot for helpful insights into this tax.