Decrease taxes on labour through Carbon Pricing


Giovanni Sgaravatti

Giovanni Sgaravatti

Last June 27 2019, the most important scientific organisation in the field of environmental and economic resources, the European Association of Environmental and Resource Economists, met in Manchester to launch a proposal for a carbon tax [1], obtaining, in 24 hours, the adhesion of more than 600 signatories among academics and scientists from all over Europe [2].

In the wake of this proposal, a European citizens’ initiative was recently launched to strengthen the European Union’s Emissions Trading System (ETS), increasing both the number of industrial sectors involved and the minimum cost of one ton of CO2. The ETS is an environmental policy instrument, based on market mechanisms, to control the emissions of all the countries engaged in the system. To date, the ETS operates among all EU Member States as well as Liechtenstein, Iceland and Norway, limiting emissions of approximately 11,000 firms including energy providers, large factories and airlines, covering 40% of EU greenhouse gas emissions [3].

Carbon pricing is nothing new or particularly ground-breaking. Sweden, for example, adopted carbon pricing policies as early as 1991, and the emission price of one tonne of CO2 in 2018 was $139 [4]. For those interested in learning more about the EAERE proposal and the possible instruments used to combat global warming, please read the post What is Carbon Pricing? by Enerlida Liko on this very blog.

The proposed reform on carbon pricing

But let’s discuss the crux of the initiative, which can be found at There are three pillars in the proposal. First, to increase the minimum price per tonne of CO2 from the current price (which fluctuates between €10 and €35) to €50. Second, to introduce a border adjustment mechanism, so as not to disadvantage companies within the EU, by imposing equivalent duties for all countries outside the EU that are not members of the Emissions Trading System (ETS). The new rules should also include sectors such as international aviation and maritime transport, which are currently excluded from the ETS. Third, and this is the most interesting point in my opinion, new revenues should be used to lower taxes on labour and on the income of the least wealthy, as well as in encouraging investment in energy efficiency and renewables.

European citizens’ initiatives, if they reach one million signatures, are then examined by the European Commission, which in turn converts them into legislative proposals for discussion in Parliament and the Council [5]. Therefore, the details of this initiative, if it reaches the quorum, would then be deliberated further and probably widely amended. In this short article I will thereby focus on the soundness of some of the ideas underlying the initiative, rather than on its particular details.

Many EU Member States are at the forefront of renewables adoption and the EU ETS has often been taken as a model around the World [6]. Unfortunately, however, the climate crisis is getting worse every year and even the European model is not drastic enough in the eyes of an increasingly large part of the scientific community. Despite its limitations, the ETS has great potential and that is why the initiative we are discussing aims to strengthen it rather than reinvent it.

EU ETS Carbon Pricing
Source: 2020 State of the EU-ETS-Report-Long-Presentation

Double dividend

So let us come to the most interesting point of the initiative: the use of revenues from the expansion of the ETS. To date, the funds have been used to promote renewable energy, energy efficiency and sustainable transport.

Source: Report from the European Commission to the European Parliament and Council {SWD (2018), 453 final} (figures in billion of euro for the period 2013-2017) 

The novelty of this initiative is that of using the new resources for tax relief for businesses and workers. At a key moment in the history of the European Union, which has just passed two of the darkest quarters in its history, distortionary taxes on the labour market represent a huge burden for the recovery of employment. In addition, the European Commission is desperately looking for solutions to expand its multi-annual budget and use the additional resources in the green economy and the labour market. Finally, using the revenue from this carbon tax to reduce taxation on workers would make it easier to adopt the new measure and would protect the most vulnerable individuals in society by stimulating employment and offsetting a possible loss of purchasing power (due to price increases) with a parallel net wage rise [7][8][9].

In terms of employment, the effect of lower taxation on labour would add to that of investments in renewable energy and energy efficiency. A study by Heidi Garriet-Peltier and substantiated by Oxford University has shown that these investments require a larger workforce than those in fossil fuels, with an average of 7.49 jobs generated for every million dollars invested in renewables and 7.7 for every million dollars invested in energy efficiency, compared to just 2.65 new jobs created by a million-dollar fossil fuel investment [10].

Source: Nasa

As The Economist points out in an article on 23 May “The world urgently needs to expand its use of carbon prices[11], there may be many difficulties in implementing such a proposal: from determining the ecological footprint in terms of CO2 -or equivalent gas- of goods and services provided by each company, to the unpredictable reaction of superpowers such as China and India, which could respond to the border adjustment mechanism with new duties on EU goods and services.

Despite these enormous challenges, I believe that the European Union must continue in its role as a forerunner in the fight against climate change. This European citizens’ initiative can provide a push in the right direction. I invite you to read it and share it, together we can still change the course. 

Giovanni Sgaravatti


[1] Economists’ Statement on Carbon Pricing – EAERE

[2] EU economists call for carbon taxes to hit earlier net zero goal

[3] EU Emissions Trading System (EU ETS) | Climate Action

[4] State and Trends of Carbon Pricing 2018

[5] How it works | European citizens’ initiative – portal

[6] The EU ETS: The Pioneer—Main Purpose, Structure and Features

[7] Environmentally motivated energy taxes in Scandinavian countries

[8] OECD Environmental Performance Reviews – Germany

[9] Environmental Fiscal Reform in Developing, Emerging and Transition Economies: Progress & Prospects

[10] Working Paper No. 20-02 Hepburn, O’Callaghan, Stern, Stiglitz and  Zenghelis Working Paper No. 20-02 and


To read more on the topic

Read More – Stop Global Warming (European Citizen Initiative on Carbon Pricing)

Economists’ Statement on Carbon Pricing – EAERE

Trust in the Single Market? The case of the EU Emissions Trading System

EU economists call for carbon taxes to hit earlier net zero goal (28 June, Financial Times)

The world urgently needs to expand its use of carbon prices (23rd of May, The Economists)

Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?Cameron Hepburn, Brian O’Callaghan, Nicholas Stern, Joseph Stiglitz and Dimitri Zenghelis Forthcoming in the Oxford Review of Economic Policy 36(S1) 4 May 2020 Oxford Smith School of Enterprise and the Environment | Working Paper No. 20-02 ISSN 2732-4214 (Online)


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