Background

In the last few years, many countries around the world have taken actions to reduce carbon emission using environmental regulations. Internalization of external costs most commonly involve carbon taxes and emission trading systems. The European Union has created the EU Emissions Trading System (EU ETS), created to trade a capped number of greenhouse gas emissions between countries. The ETS reduces emissions from 500 aircraft operators flying between EEA’s airports and 11,000 power plants and manufacturing installations. The ETS is based on cap-and-trade principles where the participating countries must monitor and report emissions and use allowances to cover any emissions. The emissions may be traded to enable abatements. This trading system for GHG emissions covers over three-quarters of the allowances traded on the international carbon market and 45% of the EU’s GHG emissions. However, despite covering much of the EU’s emissions, many of these participating European countries have also adopted their own ways of reducing emissions that the EU ETS may not target as strongly. Finland, Poland, and Sweden were the first three European countries to introduce a carbon tax, and many more countries have followed. The scope and scale of each country’s carbon taxes is different because different greenhouse gases may be taxed at different levels. Italy is one of the most recent countries to join the list, mainly due to their rising concerns about emissions in private sectors and transportation.

Carbon Tax in Italy

In 2015, Italy did not have an explicit carbon tax. They relied on highly specific taxes on energy use and the EU ETS. A majority of their untaxed and unpriced emissions originated in the residential and commercial sectors, specifically with transportation. Emissions not included in the EU ETS are called non-ETS, and for Italy, those included the civil sector (households, service companies), transport, agriculture, and waste. These four sectors are responsible for 60% of Italy’s total emissions, with transport and residential sectors being the highest (Figure 1). Since Italy’s goal was to reduce emissions by around 16% in 2020 compared to 2005 levels, tackling these high emission sectors was in their top priorities, leading them to begin implementing a carbon tax.

Figure 1

Making up around one-fourth of Italy’s emissions, the transportation sector attempts to tackle a very large problem. With its lack of policies and poor communication between city planners and public transit, Italy is one of the most highly motorized countries in Europe. While many of its inhabitants take advantage of public transit, Italy still holds one of the highest cars per capita rate in the EU. The main goal of the carbon tax is reducing households’ private transportation demand, as well as raising revenue to lower other non-environmental taxes and improve transportation infrastructure. The revenue may also be used to incentivize the transition to renewable energy by replacing the charges on the electricity tariff. Along with the cap-and-trade model of the EU ETS, the Italian carbon tax would be introducing the idea of the polluter-pays-principle to keep the tax burden off of poorer families and companies. The families and companies that emit more and consume more fuel would be carrying the financial burden much more greatly.

In order to implement the carbon tax, data was collected and studied over several years to find the average emissions in the private and commercial sectors, attempting to derive possible market rates for carbon taxes that would lower emissions and maximize revenue (Figure 2.) Through examining the fuel consumption and emission habits of the commercial sector at different fuel rates, it was predicted that large companies may not change their spending habits with most changes in carbon tax amounts. However, private households may alter their fuel consumption habits. Along with transportation, the carbon tax also creates incentives to encourage efficiency in the residential sector. By requiring energy requalification of buildings, machinery, electrical appliances, etc., emissions may be lowered as well.

Figure 2

While currently applying the carbon tax to the market, Italy has concerns that it won’t lower emissions for transportation in the commercial sector because they still need to operate their businesses. However, they are hopeful that it will decrease emissions for private households, while also creating revenue for other projects and energy improvements throughout the country.

References

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

Cingano, Federico, and Ivan Faiella. “La Tassazione Verde in Italia: LLAnalisi Di Una Carbon Tax Sui Trasporti (Green Taxation in Italy: An Assessment of a Carbon Tax on Transport).” SSRN Electronic Journal, 2013, doi:10.2139/ssrn.2410196.

Glowacki, Michael. “European Union Emissions Trading System (EU ETS).” Emissions-EUETS, Glowacki Law Firm, www.emissions-euets.com/carbon-market-glossary/872-european-union-emissions-trading-system-eu-ets.

OECD. “Supplement to Effective Carbon Rates 2018.” OECD, 2018. https://www.oecd.org/tax/tax-policy/effective-carbon-rates-all.pdf