To deliver on the flagship European Green Deal, there is a need to introduce a new source of revenues for the EU budget under the form of carbon tax, writes Ivailo Kalfin.

Ivailo Kalfin, a former Bulgarian minister and MEP, was a member of the Monti group on the future EU budget and senior adviser to former budget commissioner Günther Oettinger.

The new European Commission started shaping the instruments intended to secure the delivery on its political priorities. A major cornerstone was the presentation of the sources and the volume of the financial resources needed to achieve the flagship Green Deal.

The EU Green Deal Investment Plan is supposed to mobilize around €1 trillion for the next decade which represents the first tier of the road to climate-neutrality by 2050.

Around half of the money is expected to come from the EU budget, which means that there will be a horizontal streamlining of climate-related measures across all the programs of the Union.

The use of EU funds will require co-financing from the member states’ budgets and the estimate for these funds amounts to €114 billion. Another €300 billion is expected to come from financial instruments related to Invest EU and the ETS instruments.

The remaining €100 billion are supposed to come from the so-called Just Transition Mechanism. This is a tool aiming to assist the transition to climate-neutrality in the regions mostly affected by the expected change.

The Just Transition Mechanism is expected to generate funds from three sources – €7.5 billion especially dedicated in the next Multiannual Financial Framework 2021-2027, used as multiplicator to mobilize a total of €40-50 billion of public money from the national envelopes of the EU funds and the national budgets.

Second, Invest EU is expected to mobilize about €50 billion of investments in these regions as a mix of EU and private funds and finally, the EIB will deploy a dedicated loan mechanism, expected to provide another €25-30 billion of investments.

The Commission assured that the €7.5 billion budget line for the Just Transition Fund will be “coming on top of the Commission’s proposal for the next long-term EU budget”.

This commitment was immediately reflected in the reaction of the major political groups in the European Parliament who declared that they will expect an increase with fresh money on the top of the MFF proposal from May 2018.

This sounds realistic as the new Commission comes with its new priorities. However, adding the 7,5 billion to the original proposal would bring the planned fiscal commitments to 1.17% of the EU’s GNI – a slight increase compared to the 1.11% currently on the table.

Easier said than done, since the 1.11% proposal is far from generating the required unanimity in the Council.

Apparently, we have three options. First, the Council agrees on the original proposal of the Juncker Commission, adding the climate priority of von der Leyen Commission.

Unfortunately, the perspectives before this scenario are grim. Second, the Council agrees to the proposed 1.11% of the GNI, accommodating the 7.5 billion for the Just Transition Fund.

This would provoke critics that de facto the new priorities of the Commission will not be financed with additional funds which will undermine the political decision for the climate-neutral Union and provoke a blow to the credibility of the Commission and the EU as a whole.

The third option is to adopt a budget with a ceiling anywhere between the current proposal of 1.11% of the GNI and 1% of the GNI, as the so-called Hanseatic countries propose.

That would mean total blackmail of the current European Commission with all the resulting destabilizing consequences until the end of the current political cycle.

How can the EU justify its role if such an ambitious commitment as the climate-neutrality, requiring according to Commission’s estimates a steady annual investment of €260 billion, is left to be achieved with a seriously decreased budget after Brexit?

If the political commitment is a fact and the resources are not provided, then there should be no surprise that the credibility of the Union among its citizens and partners would be irreversibly damaged.

Actually, there is a fourth way out and it is a very good one since it departs from the zero-sum game perception of the EU budget. A wise decision would be to introduce a new source of revenues for the EU budget under the form of carbon tax.

Actually the border carbon tax was mentioned by von der Leyen at the hearings in the European Parliament, but not as an own resource. The border carbon tax should be considered as an instrument to create a level playing field.

The pressure on the EU producers to limit emissions comes at a cost. This cost creates a competitive price advantage for anyone producing outside of the EU. Hence the final effect of the carbon leakage is a pressure on the EU business with a small impact on the environment.

Hence, if the EU climate diplomacy does not succeed to secure the environmental commitment from external partners, they should at least not gain a competitive advantage on that basis. Access to the EU market is a strong enough incentive to align with the environmental goals of the Union.

The calculation of the border carbon tax should be simple enough. One way to fix it is to use the latest statistical data, defining the share of the ETS and other climate-related expenditures on the cost of products and services. Import of similar goods and services from third countries should be adjusted accordingly to preserve the level playing field.

Another possibility is to adopt a producer-specific approach and to certify producers who observe high environmental standards and are allowed to import to the EU without additional burden. The ones not having this certificate will have to pay additionally in order to have access to the EU market. This is a fair approach, in line with good market principles. The border carbon tax should be revenue to the EU budget, collected and transferred together with the customs duties.

There is no logic to channel the revenues from the carbon tax to any national budget. It would be eventually imposed as a consequence of an EU policy and the proceeds should be used to deliver on the commitments leading to this particular levy.

The introduction of the border carbon tax as an EU own resource would solve the funding of the Just Transition Fund dilemma and generate additional funds to deploy policies restricting the emissions.

It would also be welcomed by the EU producers as the level playing field in competition would be restored and, last but not least, would exercise a considerable pressure on the external partners to follow the EU environment commitments.