Background and Passage of the Law

Spain established its tax on fluorinated greenhouse gases in 2014. Fluorinated gases are used primarily for refrigeration and air conditioning systems. While fluorinated gases are a relatively low percentage of total GHGs emitted, they have a uniquely high global warming potential, compared to other GHGs (Sastre). This was, and still is, Spain’s only tax on carbon emissions, applying to around 3% of their country’s total carbon footprint (Asen).

In crafting the bill, Spain considered thoughtfully the interests of the main sectors affected by the tax, which actually helped the bill be more effective. Indeed, as we will see, considering the perspectives of the main industries affected minimized the pain inflicted on companies while allowing for an easier transition to more environmentally friendly alternative technologies. This perhaps shows that it is indeed possible to consult the companies affected by the law without watering down the environmental objectives, if done correctly (UNFCCC).

Tax Structure and Logistics

The tax rates were set in proportion to the warming potential of each gas (until warming potential reached a certain threshold, where a flat rate took over). For gases with warming potential from 150-4300, the tax rate gradually increases, and for gases with a warming potential above 4300, there is a flat rate of 100 euro per kg. There is huge variability in warming potential of fluorinated gasses: HFC-41, for example, has a warming potential of 97, while sulphur hexafluoride has a warming potential of 22,200. The structure of the tax allows the most harmful types to be taxed most heavily, while benign types are exempt or taxed at very low rates (Sastre).

The tax applies to the final consumer of the fluorinated gases, which in this case is usually the companies using the fluorinated gasses in their production process. In cases where the producer did not actually use the fluorinated gas in production but sold it to the consumer, the consumer would be taxed. The tax is structured such that only one member in the value chain is taxed (Sastre).

Spain has been quite stringent in motoring potential fraud with respect to this tax. The Spanish Tax Agency makes frequent inspections and imposes fines on companies not complying with their taxes. This strict enforcement has been successful in making sure companies actually pay what they owe (UNFCCC).

Spain also paired their fluorinated gas tax with other measures that made it easier for companies to adopt other technologies to replace the potent fluorinated gases. They have implemented both subsidies for these alternative technologies and trainings in how they work. This allowed companies to quickly transition to these other technologies (UNFCCC). This was likely a product of the aforementioned consultation with companies that occured in the crafting of the law.

Results

This tax has proved quite successful in reducing Spain’s fluorinated gas emissions. Since the tax’s implementation in 2014, emissions of fluorinated gases have fallen 65%, a huge change. This change was driven by companies switching to different refrigeration technologies. For example, many have switched to using CO₂ and NH₃ as refrigerants. Companies have also implemented changes to existing units, including the installation of advanced leakage control systems and the substitution of other fluorinated gases with a lower warming potential (UNFCCC). There has also been no evidence of a loss of global competitiveness in the industries most affected by the tax, despite some predictions to the contrary (Sastre).

While this is already encouraging, there may be more benefits to come from Spain’s fluorinated gas tax. It has encouraged increased investments and employment in green technology that could allow fluorinated gas emissions to fall even more in the coming years by leading to more green innovation (UNFCCC).

A large part of the success of this tax is certainly due to the fact that the primary sectors emitting fluorinated gases had alternative technologies they could substitute relatively easily. Had this not been the case, it would have likely taken years of investments in new technologies before emissions reductions of this scale were realized.

Areas for Improvement

While the tax has been a success to date, there are potential alterations to the structure of the tax that could improve its efficacy. Firstly, the 100 euro cap restricts the ability of the tax to scale with the most harmful of fluorinated gases. The cap kicks in at a warming potential of 4,300, but as previously noted, there are fluorinated gases with warming potentials as high as 22,000. From a tax incentive perspective, there would be no reason for a company to substitute a fluorinated gas with a warming potential of 4,300 for one with 22,000, because the tax rate would be the same. Raising (or perhaps even eliminating) the cap on increasing rates would provide even stronger incentives for a company to do away with the most harmful fluorinated gases (Sastre).

There are also a handful of other more minute design and implementation issues, including confusion as to what “final consumer” means, lack of oversight on online sales, and lack of clarity as to how anomalous emissions (like accidental fires) should be treated (Sastre).

Sources

Asen, Elke. “Where Is Carbon Taxed in Europe?” Tax Foundation, 2 Jan. 2020, <http://taxfoundation.org/carbon-taxes-in-europe-2019>.

Sastre, Sergio. “Tax on fluorinated greenhouse gases in Spain”. Institute for European Environmental Policy. December 2016, <https://ieep.eu/uploads/articles/attachments/a3977c6e-7f07-4da9-bae2-ed3e060593da/ES%20Fluorinated%20Gases%20final.pdf?v=63680923242>

UNFCC. “A compilation of questions to – and answers by – Spain”. 11 June 2019, <https://unfccc.int/sites/default/files/resource/SBI50_ESP_MA_QA.pdf>