The problem with the CO2 tax

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Far from being a marginal issue, the fight against climate change dominates the political debate worldwide. Climate protection has been a decisive issue in the recent European elections as well as various parliamentary and regional elections in the last few months. It has pushed other contentious topics such as migration and social justice off the top of the political agenda. In Germany, too, the government and opposition are trying to launch far-reaching new concepts in order to curb climate change.

The most intense discussions at the moment centre on the introduction of a CO2 tax. This is intended to reduce CO2 emissions by making them more expensive. One argument in favour of the CO2 tax is that it is easy to implement and acts as an incentive while avoiding excessive intervention in the market. Some politicians may regard the CO2 tax as a winning policy in future ‘climate elections’. Yet events abroad show that, in reality, the opposite could happen. Just because voters are calling for more climate protection doesn’t mean they are willing to pay extra for it. If other countries are anything to go by, it would appear that candidates who raise the prospect of additional costs meet resistance and ultimately lose the election.

The most recent example is last May’s parliamentary election in Australia. According to opinion polls, climate protection was a key issue for people in the election campaign. The opposition Labor Party had unveiled a climate-protection agenda including reintroducing the CO2 tax that was abolished in 2014. By contrast, Prime Minister Scott Morrison’s conservative Liberal Party put forward policies at the opposite end of the scale. They promised to maintain the use of coal, and even to open further coal mines.

Although Labor led in the polls for several months, they suffered a surprising defeat in the election. Their concept gained approval in prosperous urban centres, but not in rural areas, where there were concerns over costs and unemployment. This is despite the fact that the effects of climate change are already apparent throughout the country in the form of heatwaves and droughts.

Bad examples

France also serves as a cautionary tale. The last socialist government introduced the CO2 tax back in 2014. Newly elected President Macron’s attempts to increase it in autumn 2018 sparked the violent gilets jaunes protests. As a result, the increase has been delayed so far. Controversial policies saw the preceding socialist government hit record levels of unpopularity and Macron’s approval ratings fell to all-time lows during the protests.

Attempts to introduce CO2 pricing in Canada have produced mixed results so far. Corresponding schemes came into force in Alberta and British Columbia back in 2007 and 2008, and other provinces followed suit. In 2018, some 80 per cent of all Canadians lived in a province that charged a CO2 tax. Then, in June 2018, the conservative opposition in Ontario seized on the CO2 tax as an election-campaign issue – and won. They abolished the tax shortly afterwards. CO2 pricing went on to become an election-campaign issue in other provinces, too.

Yet on closer inspection, the Swiss model would not satisfy ambitious advocates of environmental protection.

Alberta has since abolished its pricing system again and other provinces are trying to prevent such a scheme. In the current election campaign, Prime Minister Trudeau’s government has backed nationwide CO2 pricing in order to emphasise its green credentials. It proposes a flat-rate rebate to all households in order to boost acceptance of the tax. However, in many opinion polls, the ruling government trails the conservative opposition, which is against a CO2 tax. The outcome is uncertain.

The final example is Ireland, where the government of conservatives and social democrats introduced a CO2 tax in 2010 as part of the EU bail-out package to help balance the budget. As a result, both parties were punished in the subsequent general election. The Irish Labour Party took a particular battering, with its share of the vote falling by more than 12 percentage points.

The exceptions

Of course, there are exceptions: CO2 taxes work very well and are broadly accepted in several countries. These include the Scandinavian countries, which introduced these taxes back in the early 1990s and have since increased them. Success has proved them right: their CO2 emissions have fallen despite economic growth. However, CO2 taxes were introduced there as part of sweeping tax reforms, which saw other unpopular taxes repealed in return. In addition, the political climate was different back then. Income inequality and a shrinking middle class were not debated at the time as they have been since the global financial crisis of 2008 – or at least not with current levels of intensity.

Some voters may not even have noticed the introduction of CO2 pricing as it was part of extensive tax reforms. The new Danish prime minister, Mette Frederiksen, was a strong proponent of more climate protection in her recent successful election campaign. She focused on stepping up investment, but did not explicitly call for a rise in the Danish CO2 tax.

Switzerland in particular is often cited as an example of best practice for a successful CO2 tax. Launched in 2008, it has since been increased several times without protest. Two thirds of the proceeds are redistributed to the population, and a third is spent on insulating buildings. Scientists broadly agree that this kind of approach boosts acceptance of CO2 taxes. Yet on closer inspection, the Swiss model would not satisfy ambitious advocates of environmental protection. The tax mainly applies to heating: it does not cover mobility and electricity. Petrol is no more expensive in Switzerland than in Germany.

At 96 Swiss francs per tonne of CO2, the level of the tax is nowhere near the €180 per tonne demanded by the Fridays for Future demonstrators (this also applies to Scandinavia). And in 2015, more extensive CO2 taxation was rejected in a popular vote. It suffered the second-heaviest defeat of any proposal ever put to a popular vote in Switzerland. 92 per cent of those who took part voted against replacing VAT with a comprehensive CO2 tax.

Of course, these failures of climate protection at the ballot box are not entirely down to the CO2 tax: the defeated Labor Party in Australia fielded a weak lead candidate and French president Macron abolished the wealth tax before increasing the CO2 tax, a move widely regarded as unfair. In the meantime, the tide appears to have turned, and CO2 pricing has gained in popularity.

The German case

However, this is not the case in Germany: there is widespread acknowledgement that climate change is a major problem and action must be taken, including environmental tax reform. Yet there is no majority in favour of a CO2 tax, even if relief elsewhere is promised: 62 per cent reject a tax of this kind, while 34 per cent are in favour. It is no surprise that not even relief measures are enough to win people over to CO2 pricing – who can be sure that they will really offset the costs of the tax? Many voters clearly think it is better not to impose a tax in the first place.

Sympathisers for the demands of Fridays for Future are likely to be greatly unimpressed with all this.

Other spending and charges relating to climate protection are unpopular. For instance, there is no majority in favour of a car toll or the Greens’ €100 billion investment plan, which most people believe is too expensive. Only higher air fares gain widespread support; although this is hardly surprising, as most of the population fly rarely, if at all. Overall, most Germans put their trust in technical innovations that are intended to cut CO2 emissions. Whether you agree with this or find it naive, it is useful information for anyone aiming to build a majority in favour of an effective climate-protection policy.

Climate change is a problem with no easy solutions. A big bundle of different measures probably has the best chance. An extensive CO2 tax covering electricity, heat and mobility will struggle to win support. A tax is more likely to succeed if, as in Switzerland, it covers only a subset of emissions, the proceeds are reimbursed, and it is increased gradually. But that in itself is not enough. This partial tax must be supplemented by other measures that give people a positive outlook. One neglected strength of the much-criticised coal consensus is that its message is focused on a widely-shared goal: the phase-out of coal. By contrast, the concept of CO2 taxes steers attention towards something that is largely rejected: higher taxes.

Consensus also has to be found in other areas such as mobility, where a move away from the age of the combustion engine is essential. This type of consensus has the advantage of raising the prospect of huge investment in a better, more environmentally sound future. It offers the carrot rather than the stick. For example, a mobility consensus could provide for the large-scale expansion of charging stations, cheaper and more frequent local public transport, a scrapping premium for diesel cars and huge spending on technical research. Specific projects of this kind (not just the promise of vast sums) may have the potential to reconcile people to climate protection.

Sympathisers for the demands of Fridays for Future are likely to be greatly unimpressed with all this. But the hard truth is that approval of higher CO2 prices in Western countries is confined to a small part of the population. The majority remain sceptical. Consequently, those who currently promote extensive and high CO2 taxes from a centre-left perspective indirectly run the risk of providing ammunition for right-wing populists in election campaigns. Yet most of all, they risk a dangerous backlash against climate protection itself.