The just battle against the madness of the ETS

The idea of environmental taxation was introduced into public debate in the 1980s. The basic proposal was simple: to apply a tax to certain types of production to offset the negative costs – the so-called externalities – that they imposed on the environment. This would have a twofold effect: to discourage the most polluting activities and to generate revenue to be used for environmentally beneficial measures. It was also believed that this additional revenue could make it possible to reduce taxation on earned income. Less tax on labour, more tax on polluting activities.

The ETS, or Emissions Trading System, is undoubtedly one of the most widespread and significant applications of this principle. It applies across Europe to various economic sectors that produce CO₂ emissions and is set to expand progressively. The energy sector is one of the hardest hit, based on the belief that charging for CO₂ emissions would encourage the transition to clean energy. Inevitably, the focus has fallen first and foremost on coal and then on gas, which produces around half the emissions of coal.

There is, however, a significant issue that the European Union has been reluctant to acknowledge, one that is particularly evident in Italy. With coal now almost entirely phased out of electricity generation, it is primarily gas that bears the cost of the ETS among the fossil fuels used to generate electricity. But when the scheme was introduced, gas cost around a quarter of what it does today. The ETS therefore made it more expensive to generate electricity using gas. And here lies the main issue: if the price of gas rises – even quadrupling – for reasons unrelated to the ETS, such as wars and embargoes, what is the point of maintaining a mechanism designed to discourage its use? It is a clear contradiction, the ultimate result of which is to further increase the cost of energy.

The EU should have taken note of this situation some time ago – at least since the embargo on Russian gas was decided – and suspended the scheme or, at the very least, made it more flexible by adjusting it to fluctuations in the price of gas. There is no need for a further tax to discourage its use. Its current price on international markets is sufficient. It would seem to be pure common sense. But the EU’s stubbornness in defending the ETS also reveals other aspects of the issue. The scheme generates significant revenue, currently allocated to national budgets, and the reform of the European budget provides for a significant share to be allocated to funding the Union’s budget. Furthermore, an international market has developed around emission allowances, with all the speculative dynamics typical of financial markets. Neutralising them would therefore result in losses for the financial institutions exposed to them.

The ETS also creates an implicit incentive in favour of energy sources and production methods that do not use gas or other fossil fuels. In electricity generation, it is essentially renewables – including hydroelectric power – that benefit. The cost of gas has risen, but that of solar, wind and hydroelectric power has not. Yet, due to the mechanism by which electricity prices are set – which is largely determined by gas – these sources benefit from the same price, further increased by the ETS, without having to bear the associated cost and without necessarily having made any additional investments.

In the meantime, however, the installation costs of solar power systems have fallen by a factor of seven or eight compared with those of the first systems fifteen years ago, and their production costs are now very low. Renewables are perfectly capable of competing in the market, thanks in part to the use of batteries, the price of which has also plummeted. There is therefore a quick way—which depends entirely on the decisions of the European Union—to substantially reduce the price of energy: suspend the application of the ETS. What are you waiting for?