The end of the Energy Tax Directive and Cheap Oil

I was struck by the contrast between Lord Stern’s comments on the impact of cheap oil and the fate of the Energy Tax Directive. Lord Stern is quoted as saying “this is exactly the right moment to remove fossil fuel subsidies and intensify carbon pricing” and I completely understand why he says this. Consumers and business have complained of the impact of high energy prices and carbon pricing on the cost of living and competitiveness, so a fall in energy prices provides an opportunity to consider the best trajectory for carbon pricing.

Now an issue is to understand what energy prices are likely to do in the future and here the divergence of opinion on the impact of low oil and energy prices is fascinating – commentators struggle when fundamentals appear to change, they can comment on the obvious – that this is bad for a Russian economy which is so dependent on oil – but disagree on why we have got here and where we are going. The impact of US shale oil on US demand seems to be accepted, the global supply balance has been altered. But why has demand fallen as well? Some attribute this to climate change, milder northern winters, but there is little comment on the impact of other power sources. While renewables are a small proportion of energy production their share is moving in one direction and that is to decrease demand for oil. One recent fact to highlight this, a small one agreed but something which would have been dismissed five years ago. In November, Scottish wind power supplied more power than domestic demand in Scotland.

So how should policy makers react to the fall in the oil price. Well I think Lord Stern is correct, this is an opportunity to use some of this price fall to soften the impact of removing subsidies for fossil fuels (which OECD estimated in 2012 these subsidies had an annual cost of  $55-90bn:

“The OECD has compiled an inventory of over 550 measures that support fossil-fuel production or use in its 34 member countries. Those measures had an overall value of about USD 55-90 billion a year between 2005 and 2011. “ It is also an opportunity to adjust the price of carbon again with the impact softened by the fall in the oil price. If this opportunity is not taken, two things occur, first the windfall is squandered in terms of moving to a low carbon economy and second it will be more painful to do it in future and painful means more difficult politically.So in this context we have the news that the Energy Tax Directive (ETD) revision has been withdrawn from the 2015 because it has been “denatured by the states”.

 

This goes completely against the comments by Lord Stern, so why? Well the current revision of the ETD has been in process since 2008 and seeks to provide a harmonised basis for energy taxation on the basis of energy content and to introduce a carbon tax element for those emissions not priced by the Emission Trading System within the EU. Progress has been painfully slow and reflects the issues which bedevil a global deal but at a European level. New member states (read developing countries globally) are not prepared to agree to this basis of taxation, so we are left with a European Single Market where energy and carbon pricing does not provide a level playing field and the burden is disproportionately born by older member states. This is a political issue, the technicians have worked tirelessly to produce a coherent model and done a pretty good job, it is the lack of political will which has slowed progress and now killed the measure just at a point when the price of this change would be cushioned by the fall in energy prices. This is very sad, because we do need a framework for energy taxation and carbon pricing (even if it applies at a low level) as a means to move forward and as a basis for investment decisions. As Lord Stern says, the current change in the oil price provides the opportunity to address this issue not to shelve it.

 

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