Stefan Speck, European Environmental Agency on impact assessment

Post-Growth 2018 Conference Internalizing Externalities

18-19 September 2018 Brussels, Belgium Stefan Speck

Internalising externalities – polluter pays principle The polluter pays principle is a way of ‘internalising the externality’.

In 1972, the OECD wrote Guiding Principles concerning International Economic Aspects of Environmental Policies, stating: ‘… the polluter should bear the expenses of carrying out … measures … to ensure that the environment is in an acceptable state.’

Principle 16 of 1992 Rio: ‘…to promote the internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution’.

Work done by EEA – examples Costs of air pollution from European industrial facilities (EEA, 2014) • This report presents an assessment of the cost of damage to health and the environment in monetary terms from air pollution released in the years 2008 to 2012 by industrial facilities in the EU-27, Norway and Switzerland.

Road user charges for heavy goods vehicles (HGV) (EEA, 2013) • The report presents estimates of the external costs of air pollution for different categories of heavy goods vehicles (HGVs).

Work done by EEA – examples

Conceptual challenges • Problems in analytical methods and data shortcomings make estimates of external costs and the degree of internalisation uncertain • External costs are valid with regard to the specific case; difficulty to scale them up (local vs. national scale) • No considerations of critical natural capital and tipping points

Environmental taxation and internalising externalities

‘A well-designed carbon price is an indispensable part of a strategy for reducing emissions in an efficient way’ (High-Level Commission on Carbon Prices, 2017).

Economic theory for having a cost-effective and efficient carbon taxation scheme: all sources would be covered and the tax rate ‘would be set equal to the marginal benefits of emission reduction, represented by estimates of the social cost of carbon’ (Aldy and Stevens, 2012)  assessment of external costs - internalising external costs - going back to Pigou (1920); ‘corrective taxes’

Pragmatic approach – example: Swiss CO2 levy

‘Standard price approach’ - tax rate is set and can be increased so that tax is sufficient to reach a given environmental reduction target – going back to Baumol and Oates (1971) The Swiss CO2 levy on thermal fuels was introduced in 2008 and rate increased from CHF 12/t CO2 to its current amount of CHF 96 CHF/t CO2, as the interim targets for fossil thermal fuels set by the Federal Council had not been reached.

Impact assessment: the CO2 levy has led to noticeable emission reductions (Federal Office for the Environment, 2018)

How to set future carbon prices – corrective tax or standard-price approach?

As regards valuing carbon damages, the standard approach in the economics literature would be use the social cost of carbon ‌

In light of the 2015 Paris Agreement, countries may instead prefer to use CO2 values in line with their mitigation pledges.

Coady et al., 2017 - Energy Price Reform: A Guide for Policymakers, https://www.cesifo-group.de/DocDL/cesifo1_wp6342.pd

Values in policy appraisal and evaluation Closely connected: estimating the social value of reductions in GHG emissions (social cost of carbon) to be used in costbenefit analysis aiming to support decision-making (for example investment decisions) Source: Smith, S. and N. Braathen (2015), “Monetary Carbon Values in Policy Appraisal: An Overview of Current Practice and Key Issues”, OECD Environment Working Papers, No. 92, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jrs8st3ngvh-en

Thank you for your attention!

Stefan Speck Stefan.speck@eea.europa.eu www.eea.europa.eu