Future EU Financing: Energy policy in the Monti Report

Pablo Balsinde // 6 February 2017

Last month, a group of European politicians, headed by Mario Monti released a report titled “The Future Financing of the EU”. The report, which was discussed  last week at this year’s European Parliamentary Week, argues that Europe should aim to become self-funded to a greater extent. As part of the Multiannual Financial Framework, it addresses fundamental European budgeting problems and suggests many policy solutions. The central diagnosis of the paper is accurate in pointing out how current developments in European politics necessitate fiscal reform. However, the policies recommended should be refined and further discussed, because, at least at this stage, research shows how they could be harmful to the European economy and inefficient in their purpose. Here we focus on the ones related to energy and environmental policy.

 

The report is correct in arguing that the current geopolitical and economic climate requires reforms that focus on stability, sufficiency and sustainability (Monti et al. 2016: 36). Given recent developments like the United Kingdom’s decision to leave the EU, which will entail a loss of around 10% of member contributions, and the abysmal financial and humanitarian failure of the EU in dealing with the Syrian refugee crisis, it is clear that the Union should aim towards financing itself from its own resources, which should give it stability and allow it to properly intervene in singular situations like the refugee crisis. Moreover, reform would address the deep-rooted problem the Union has in proving its value to European citizens. Although the famous 55 million pounds a day Nigel Farage reiterated it cost Britain to be a member of the EU did not take into account the UK rebate, it relied on deeply misguided measures of what the benefits of that payment were. Much on the report looks at ways of tackling this problem by making the EU’s benefits more visible (Monti et al. 2016: 27). A crucial recommendation for this worth mentioning is a call to reduce agricultural subsidies, which constitute about a third of the EU budget, and which experts agree create price distortions and limit productivity.

 

Since the EU budget is expenditure-driven, an increase in the revenue from own resources like tariffs or value added taxes would reduce the contributions Member States have to make to the Union. There is no doubt that some members are net contributors and others are net receivers, but these measures would reduce countries’ capacity to exaggerate the extent of their net contribution to the Union – providing stability to the budget.  In this respect, we find the report sound, but an overview of the policies outlined suggests that they should be further discussed and, hopefully, improved.

 

Many proposals included are also intended to support EU environmental and energy policy, one of the main focuses of the Commission in 2017. The policy suggestions include carbon pricing, a broadening of the Emission Trading System (ETS), a motor fuel tax, and a tax on electricity. As part of the research EPICENTER is currently conducting, we argue for a significant expansion of the ETS. It currently covers about 45% of EU emissions, and has shown to be successful in reducing carbon emissions strictly through market forces, being on track to reduce them by 43% by 2030 with respect to a 2005 baseline. On the fiscal perspective, the auctioning of the ETS allowances in 2013 yielded 3.6 billion euros, around 2.5% of the EU budget (Monti et al. 2016: 44). Given the system’s success, it is advantageous that it be expanded to the rest of the economy and included in the EU’s own resources.

 

This expansion would include the transportation industry, which accounts for a crucial 20% of European greenhouse gas emissions, and would eliminate the need for the motor fuel tax the report argues for. Unifying the emissions market would be most efficient in reducing carbon emissions and maintaining a market-based approach to pollution. There is no reason for these markets not to be harmonised when, for example, motor fuel levies provide no incentive to change driving behaviour to reduce carbon emissions (Nader and Reichert, 2015: 15). In the case of a political failure to expand the ETS to the entire emissions market, to maintain a market-based policy, carbon pricing would be appropriate for the remaining industries (such as agriculture).

 

The last energy-related policy the report argues for is a tax on electricity markets, and includes the different ways this could be implemented, whether it might be through taxing production, distribution, or consumption. It is clear that this tax would go against the efforts of the last three Commission energy directives, aimed at liberalising/harmonising the energy market. It would be borne unevenly across the Union because of widely different market structures and consumption levels, and there seems to be little justification for the EU to have fiscal jurisdiction over this market, since there is little European added value to an industry that, as of today, is barely integrated across Member States. Moreover, it would undermine the incentives set up by the ETS, and would effectively charge twice for the same emissions.

 

The policies briefly discussed here are a few of the most significant proposed related to the energy market. Major financial industry related policies were also introduced, such as the financial transaction tax (FTT) and the financial activities tax (FAT), which we have not discussed here because of the small likelihood of them becoming a reality for political reasons. Moreover, the common consolidated corporate tax base (CCCTB) was also supported, a policy that EPICENTER has done substantial research on already. With these, the pattern is clear that, although the attempt to reshape EU financing discussions based on the current political situation is legitimate, further research into the policy ideas should be conducted in other to secure effective and equitable revenue-raising policies at the EU level.

 

References:

 

Monti, et al. (2016). Future Financing of the EU: Final report and recommendations of the High Level Group on Own Resources.

 

Nader, N. and Reichert, G. (2015). Extend the EU ETS! Effective and Efficient GHG Emissions Reduction in the Road Transport Sector. CepInput. pp. 15

 

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