The public consultation on the Industry Carbon Tax Act (Wet CO2-heffing industrie) began on 24 April 2020. The government has already announced the carbon tax in the Climate Agreement. The public consultation comes one year after the bill on the minimum carbon price for electricity production, which is similar to the Industry Carbon Tax Act in several respects, although the bill on the minimum carbon price for electricity generators is only applicable to electricity generators.
The bill is still under discussion in the House of Representatives (file 35 216). In this blog we will briefly discuss the most important parts of the consultation version of the bill on Industry Carbon Tax (hereinafter: ‘the consultation proposal’). This blog will only discuss the consultation version in outline.
The consultation proposal aims to levy a tax on carbon (CO2) emissions on the one hand, while allowing trade in dispensation rights on the other. Based on the consultation proposal, companies will be granted dispensation rights, which they will also be allowed to transfer. Dispensation rights reduce the amount of emissions on which the levy must be paid. CO2 emissions trading is not new; we already have the European Emissions Trading Scheme (EU ETS). However, carbon tax and trade in dispensation rights is a national phenomenon. After the introduction of the EU ETS, the legislator also introduced a Dutch trading system for nitrogen oxide emission allowances. This system was quickly abolished because it did not work - will the system of trade in dispensation rights suffer the same fate?
Purpose, location and form of the carbon tax
The purpose of the levy is primarily to tax CO2 emissions. This is designed to encourage companies to emit less CO2 and to innovate in alternatives to CO2 emissions. According to the Explanatory Memorandum, the carbon tax is important for achieving the reduction target stipulated in the Climate Agreement. The consultation proposal amends the Environmental Taxes Act (Wet belastingen op milieugrondslag) and the Environmental Management Act (Wet Milieubeheer), which will be expanded to include a new Chapter 16b.
The carbon tax is designed as a tax with a decreasing tax allowance. This means that emissions that need to be reduced in order to meet the reduction target will be taxed. Other emissions are, in principle, exempt. Exempted emissions will be reduced linearly by a reduction factor until, in 2030, only the part corresponding to the reduction target will be exempt. The reduction factor will lead to this result since it affects the number of dispensation rights a company receives. We will explain more about this in the blog.
Rate and amount of the tax
The price of a CO2 emission allowance determines the amount of the tax. The difference between the set tax rate and the EU ETS price is the amount that companies have to pay in carbon tax. In this respect, the tax rate constitutes a minimum price. This means: the lower the price of an EU ETS allowance, the higher the amount of the tax. If the price of an EU ETS allowance is above the tax rate, the tax is zero euro (the rate cannot become negative, in which case the State would have to pay companies). The rate of the carbon tax increases every year. The initial rate per tonne of carbon dioxide equivalent is not yet known. The fact that the tax adapts to the fluctuating EU ETS price means that an effective rate will always apply. Moreover, according to the Explanatory Memorandum, the level of the tax will not exceed what is necessary to avoid undue distortions of competition.
Who is subject to the carbon tax?
Companies with installations emitting emissions related to industrial production will be subject to this tax. Such installations are also called 'industrial installations'. They include greenhouse gas installations, waste incineration plants and nitrous oxide installations. The definition of a greenhouse gas installation is consistent with the definition of a greenhouse gas installation under the EU ETS. The definitions of waste incineration plants and nitrous oxide plants are included in the consultation proposal, but we can imagine that the scope of these definitions may become the subject of discussion in practice. According to the Explanatory Memorandum, 284 greenhouse gas installations are subject to the carbon tax. A number of greenhouse gas installations do not have to pay carbon tax. Those exempt are (a) greenhouse gas installations used for greenhouse horticulture, (b) greenhouse gas installations used for district heating and (c) greenhouse gas installations used for the built environment, such as greenhouse gas installations for heating or cooling rooms in hospitals, universities, airports or auction halls. The final exemption category is (d) greenhouse gas installations that generate electricity (without the use of residual gases as fuel). This is because emissions related to electricity generation will be taxed if the bill on the minimum carbon price for electricity generators enters into force.
What will be taxed?
The tax is levied on emissions from industrial installations. This concerns three types of emissions: emissions of (a) greenhouse gases from greenhouse gas installations (b) carbon dioxide from waste incineration plants and (c) carbon dioxide and nitrous oxide from nitrous oxide installations. Contrary to what the name of the Act suggests, it does not only concern CO2; nitrous oxide (often termed ‘laughing gas’) is also subject to taxation. A number of types of emissions are excluded, including emissions from the generation of electricity and emissions from the generation of heat for district heating. However, in order to qualify for the exemption emissions for district heating are subject to the condition that 75% of the heat produced by the installation in question is intended for district heating. The final category of emissions excluded are carbon dioxide emissions that are transferred for geological storage. The Explanatory Memorandum does not explain what is meant by this, but the legislator probably means the storage of CO2 in the ground. Directive 2009/31/EC on geological storage defines CO2 storage in the ground as "injection accompanied by storage of CO2 streams in underground geological formations".
The tax base is determined by the industrial annual CO2 emissions minus the dispensation rights in that year. Industrial annual CO2 emissions are the number of tonnes of emissions caused by an industrial installation. A company that is taxable is granted dispensation rights on the basis of the amount of exempted emission allowances annually allocated. Emission allowances are determined on the basis of the benchmarks applicable in the EU ETS and the amount of production by companies. Some companies do not receive dispensation rights for certain emissions because, for example, they are covered by an exception (e.g. export of heat to district heating) or do not receive emission allowances under the EU ETS. However, the consultation proposal also contains exceptions whereby companies receive dispensation rights for emissions for which they do not receive EU ETS allowances. These exceptions, and the exact method of calculating dispensation rights, will be laid down in a ministerial regulation. In our opinion, it is not helpful to offer the Act for public consultation without clarifying these specific elements of the proposal, which are vital for many companies.
The amount of dispensation rights granted will decrease each year by means of an annually decreasing reduction factor. If a company has more dispensation rights than actual emissions and the tax base is thus negative, the company qualifies for a recalculation of tax from the previous five years. This means that the surplus of dispensation rights is offset against any shortage of dispensation rights in previous years. In such an event, previously-paid taxes may be refunded.
Who will levy the tax?
The Dutch Emissions Authority (NEa) will collect the tax. This is unusual; collecting taxes is a completely new task for the NEa. This choice was made because the NEa has all the necessary knowledge regarding emissions and the companies involved. The NEa falls, in principle, under the responsibility of the Ministry of Economic Affairs, although the intention is that the NEa will fall under the responsibility of the Minister of Finance for the implementation of the Industry Carbon Tax Act. This means that the Minister of Finance could issue instructions to the NEa. The legal framework still needs to be worked out.
Obligations for companies
Companies have to pay the carbon tax on the basis of a tax return in which companies themselves must calculate the amount due. For the purposes of the tax, companies will also have to draw up an industrial monitoring plan and submit it to the NEa. In addition, companies that are taxable must submit two reports annually to the NEa. Those reports are (i) the industrial emissions report on the amount of emissions (not related to electricity generation) and (ii) the report on the calculation of dispensation rights. The carbon tax thus imposes a heavy administrative workload on companies.
Trade in dispensation rights
Companies receive dispensation rights based on the exempted emission allowances. The consultation proposal also offers the possibility of transferring dispensation rights between parties; an interesting development. In addition to emissions trading, as currently exists under the EU ETS, there will be a trade in dispensation rights. The trade in dispensation rights may be important for achieving the purpose of the carbon tax, i.e., reducing CO2 emissions. Allowing the sale of dispensation rights is intended as an incentive for companies to reduce CO2 emissions at low cost, and to sell the dispensation rights. Unlike emissions trading under the EU ETS, dispensation rights are only transferable within a single year; companies cannot accumulate dispensation rights to trade them a year later.
Similarities and overlaps with the EU ETS
As discussed above, the carbon tax ties in with the EU ETS in various ways. The tax mainly covers emissions from greenhouse gas installations that are also covered by the EU ETS, with a number of exceptions. For the determination of the exempted emission allowances, the number of allowances to be allocated for free within the EU ETS (which is calculated on the basis of benchmarks and production of the companies) is taken into account. In addition to emissions trading, as currently exists under the EU ETS, there will be a trade in dispensation rights. Finally, the amount of the carbon tax depends on the price of an allowance under the EU ETS. The NEa is the competent authority for both the carbon tax and the EU ETS.
The carbon tax will apply in addition to the EU ETS. According to the Explanatory Memorandum, the EU ETS is insufficient to meet the national reduction targets. An additional incentive for CO2 reduction was thus required. This means that companies that fall under this category are in fact taxed twice for CO2 emissions. Although the Explanatory Memorandum pays much attention to the agreements with the EU ETS, it pays little attention to the potential adverse effects of double taxation. The Explanatory Memorandum confines itself to pointing out that, because of the limited scale of emissions in the Netherlands, the tax has no significant impact on the EU ETS. It is striking that the Explanatory Memorandum does not mention the consequences for companies that fall under both systems. The fact that the Explanatory Memorandum does not identify these additional costs indicates that such additional costs are not sufficient to deter the government from levying such a tax. The fact that companies will be obliged to incur additional costs (through either tax payments or CO2-reducing measures) is unavoidable in order to achieve the reduction targets.
The consultation proposal for the Industry Carbon Tax Act provides for a tax on the emission of CO2 (and nitrous oxide), in addition to paying the existing CO2 price under the EU ETS. The consultation proposal aims to make CO2 emissions less attractive. The consultation proposal also provides for exempted emission allowances and dispensation rights, just as the EU ETS provides for free allocation of emission allowances. In addition, the amount of the carbon tax depends on the EU ETS price. It will be interesting to see how the trade in dispensation rights, and the continuation of the EU ETS, will affect the carbon tax.
The consultation proposal is currently open for public consultation until 29 May 2020. We expect businesses covered by the EU ETS, as well as operators of waste incineration plants and nitrous oxide installations, will be keen to critically review this proposal.