Interrelations between Environmental Fiscal Reform and Emissions Trading schemes : Lessons from Hungary* Pendo Maro European Environmental Bureau (EEB) Seminar : “Environmental Subsidy Reform, how to tackle harmful subsidies”: Prague, November 21/22, 2003 *Part of discussions at WWF-EPO NGO Strategy Seminar: “Economic Instruments in EU Energy and Climate Policy in an enlarged EU of 25” Budapest/Szentendre, November 7/8, 2003.

Fiscal Instruments Taxes Emissions trading schemes Subsidies

Environmental Fiscal Reform Improves environmental protection through new or higher environmental taxes or tax differentiation Promotes subsidy reforms Encourages revenue recycling and tax shifts Effectiveness dependant on level of tax and structure - political will; public acceptance Competitiveness - we say that ecological taxes can promote innovation

EU-ETS Directive (July 2003) Principle - overall reductions in GHG emissions Downstream cap and trade system - with ceilings and targets Phase 1: ; Phase II: Based on IPPC sectors; covers all installations with thermal input > 20MW and some others; Only CO2 emissions in Phase I

EU-ETS: Operation Surrender emission allowances at year end for each tonne of CO2 emitted Penalty: Euro/tCO2: 40 in Phase I; 100 in Phase II (Kyoto phase) Allocation: Phase I: 100% free of charge; phase 2: 90% free of charge EU 25 to prepare National Allocation Plans for Commission’s approval, due March 2004!

National Allocation Plan (1) Objective: to fix cap on GHE from participating installations Annex III of Directive - provides broad criteria for allocation of allowances Public consultation (NGO participation?) No discrimination between sectors, requires compatibility with other environmental policies/legislation; early action and new entrants provision

National Allocation Plan (2) (relevance for EFR) “To achieve its Kyoto target Member State’s allocation to activities covered by the EC emissions trading scheme must be compatible with the level of emissions that it expects from activities not covered by the scheme (…) too much may be allocated to sources covered by the emissions trading scheme or alternatively, the allocations may be particularly stringent”

Sources: national and EU; complex impacts Not included in EU-ETS: but‘negative’ may affect efficiency and effectiveness of EU- ETS; has social and environmental effects ‘Positive’ subsidies may enhance EU-ETS and may promote long term sustainability and innovations NAP - within National Climate Change Strategy: check for subsidy reforms? Subsidies

Possible actions on subsides Develop/agree on methodology to identify subsidies Where to look for them? Criteria for evaluation? Develop co-ordinated actions on subsidies across EU 25 within current EU policy ‘climate’ Propose actions, areas of focus and timetable

Interrelationships EFR and ET can be complementary EFR - focus on taxes and subsidies for sectors not covered by EU-ETS ET- better for stationary emission sources; covers major energy sectors Environmental taxes - best for diffuse sources e.g. transport EFR - High energy taxes can be used as “penalties” for non-compliance with ET

Focus on NGOs Mixed reactions on proposed Linking Directive; uncertainty on co-existence of ETS mechanisms and existing instruments General limited knowledge and focus on EU-ETS and subsidies, more on taxes Limited participation and monitoring of preparation of NAPs Role of subsidies within national budgets and NAPs still unclear

Conclusion Effective market monitoring needed for functioning of fiscal instruments Legally-binding ET system, with stiffer penalties for non-compliance Need clearer allocation, monitoring, reporting and verification criteria for ET Information campaigns for public, industry and political spheres on implications of ETS More NGO involvement in preparations