Carbon Taxation in the EU: Expanding the EU Carbon Price

Abstract

The current pricing mechanism for carbon in the EU, the EU emissions trading system, only covers 40% of emissions. Carbon taxation currently plays no role. The Commission has recently proposed revising the energy tax system in the EU to include a carbon tax component. This article evaluates the Commission’s proposal and considers the possible expansion of the EU carbon pricing base, either by expanding emissions trading to cover more sectors, or by enacting a carbon tax. It concludes that there are strong arguments for expanding the carbon pricing base, as suggested by the Commission. Nevertheless, expanding the base should be done through a unified system, such as expanding the coverage of the emissions trading system or enacting an economy-wide carbon tax rather than through having side-by-side taxes and trading, as in the Commission’s proposal.