What funding for the energy transition?

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The need to reduce greenhouse gas emissions is ever more pressing. Various forms of action are available to Governments to achieve this goal. The economic instrument is one of them and taxation is one of its modalities. With the collapse in the price of a barrel of oil likely to continue, the economic viability of energy transitions could be jeopardized, over and above the health crisis, which could put it on the back burner. In particular, this could jeopardize essential innovation and creation projects such as those of Bertrand Piccard's Solar Impulse Foundation, which catalyzes and actively supports nearly 1,000 of them. In this context, shouldn't proposals for taxing fossil carbon at the extraction stage be very actively re-encouraged? With countries more than ever over-indebted, this alternative financing option for projects could become unavoidable ... This is the analysis put forward by Jacques de Gerlache, Director of Greenfacts and Romain Ferrari, President of the 2019 Foundation on the Ecological Economy.

Managing carbon emissions by imposing a refundable excise duty on the extraction of fossil fuels rather than on their emissions is an alternative and much more advantageous solution for achieving the objectives of the COP21 agreement, say Jacques de Gerlache and Romain Ferrari, while European government subsidies to oil companies have gone from strength to strength in 2019: 50 billion euros. Oil companies' investments in drilling and shale gas extraction continue despite the limits set by the Paris Agreement. Cars sold worldwide in 2018 emitted twice as much greenhouse gas over their lifetime as all the countries of the European Union, which led to the vote on 17 May 2019 in the National Assembly of the CD3032 amendment, which sets out a roadmap for the end of fossil fuel vehicles by 2040 with the objective for France to achieve by that date "the complete decarbonisation of the land transport sector" and "carbon neutrality by 2050".

Meanwhile, in the midst of the coronavirus crisis, we continue to face the challenge of establishing a reliable system for assessing, monitoring and taxing carbon dioxide and other GHG emissions. One of the main limitations is the difficulty of identifying and monitoring all emissions worldwide and determining the cost of "emission permits". Without knowing this cost beforehand, it is impossible to set a price for these permits in a (single) carbon market.

Unfortunately, the various efforts made to implement such a carbon regulatory system have proved to be very limited, even at the national or regional level. In Europe, for example, carbon emission allowances have been set relatively arbitrarily and have not been easily transposed globally or applied to a wide range of carbon-emitting activities (e.g. heating of buildings).

Emilie Alberola, Director of the Carbon and Energy Market Research Unit at CDC Climat (France), pointed out that these weaknesses in the allowance system mean that economic agents have no incentive to make the long-term investments (30 to 50 years) needed to reduce CO2 and other GHG emissions. And these limitations are particularly pronounced in times of economic crisis.

Therefore, is it not essential that we stop and reassess our current strategies and recognize that the time has come for a real paradigm shift? The current model for controlling carbon emissions is based on penalties, not incentives, and is unlikely to achieve the ambitious targets - requiring rapid action on a large scale - that we urgently need to achieve.

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Another approach to carbon management

The alternative approach proposed here aims to replace carbon taxes and other GHG emissions with an inherently dynamic, incentive-based strategy. This alternative proposal consists of two interlocking elements: the first consists of an excise duty applied to the extraction of fossil fuels and the primary production of products with a global warming potential (GWP), both synthetic and non-synthetic, including fluorinated hydrocarbons and methane; the second consists of an instalment refund that would allow the recovery of all or part of the excise duty levied upstream. Refunds would be granted in exchange for a reduction or complete elimination of emissions related to the use of substances with global warming potential.

Compared to the innumerable immediate sources of GHG emissions, there are far fewer sources of extraction/production of GHG-emitting materials. Once adopted, the principle of excise duties would be intrinsic to all participating countries and therefore easier to implement. The great advantage of this combination is that it provides inherent incentives to promote compliance: could there be a more effective strategy?

Examples of activities eligible for reimbursement include the proven development of more energy-efficient processes or facilities (agriculture, housing and transport); cogeneration of energy, including renewable energy sources; production of durable insulation materials and other non-emitting products; and recycling, fixing or long-term storage of GHGs.

Excise duty would be levied on the basis of the quantity of material extracted. Assuming that the excise duty on oil is set at $10 ($25 per tonne) and that the price per barrel is between $40 and $110, this would not constitute an insurmountable financial obstacle for immediate "professional" uses and for consumers. As some 30 gigabarrels of oil are extracted each year, the excise duty on oil alone would generate at least $300 billion. This does not include excise duty revenues from coal, traditional or other sources of natural gas (oil sands, shale gas) or, potentially, non-recycled industrial biomass (wood and pellets).

This combination of rights and refunds therefore has four key advantages: the sources of GHG emissions are innumerable, but the sources of GHG extraction/production are relatively fewer; it will therefore be simpler and easier to tax/regulate the latter; the plan has inherent incentives to promote compliance and achieve emission reduction targets; it avoids the uncertainties of the carbon market, which is inevitably speculative in nature; and it would not require direct funding from producers or States already struggling with limited resources or heavily indebted.
In a way, this is in line with Pierre Larrouturou's Climate Bank initiatives or the EU's plan to tax carbon at the borders.

And with more over-indebted countries that will find it difficult to meet their commitments in this area, this represents a real alternative ...
As for the application of VAT on any product, it would not be necessary to rely on the agreement of the "extracting" country and the amount levied (10 USD or EUR or Swiss francs per barrel equivalent...) would be less sensitive with a barrel price around 30 USD than 60 or 80 ...

For products that have already incorporated a carbon externality, this could be monetized through the following tools of circular VAT developed by the 2019 Foundation which aims to take into account the amount of externalities in the transaction price of goods and services, which has long been considered as a possible way to turn our economy around in the direction of greater sustainability.

This project is now supported in France by ADEME, through the project Modext. There are other complementary approaches such as the DaVAT project in Belgium in a European and Canadian context.

We are undoubtedly living a tipping point moment that should not be missed ...

Jacques de Gerlache(Eco)toxicologist, professor at the Paul-Lambin Institute in Brussels. Scientific advisor to the Belgian Federal Council for Sustainable Development. Manager of the multilingual site www.greenfacts.org and Roman FerrariPresident of the 2019 Foundation on Ecological Economics 

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Header Picture ©BASHTA

To go further :

  • The global green new deal "by Jeremy Rifkin - Edition Les Liens qui Libèrent (LLL),October 2019
  • "Finance, climate, wake up! "by Anne Hessel, Jean Jouzel and Pierre Larrouturou - Éditions Indigène, 2018

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