The First Step Is Hardest: Austria Adds A Carbon Tax

Column from Bloomberg

Austria has a carbon tax or, in slightly more dramatic terms: “Habemus CO₂ tax.”

But the reception in Austria and beyond was quite a bit more muted than the joyous announcement of a new pope. Environmental group Greenpeace called it “too weak, too late and ineffective.” They have a point.

The tax is low, set to begin in July 2022 and pegged to the German tax at $35 (30 euros) per ton  of CO₂, rising to $64 by 2025. That’s much below where the price should be from a climate-economic perspective, derived by tallying the costs of damages from events such as heat waves and melting glaciers. Equally important, the price is low compared with what even some businesses demand. Volkswagen chief executive officer Herbert Diess calls for a price of $75 by 2024 in Germany. That alone ought to imply that the ‘right’ price must be significantly higher still. Business ought not be ahead of politics when it comes to tackling their own emissions or those generated from use of their products.

It is also late. And therein lies the paradox of why even this low tax is worth celebrating.

The European Union’s Emissions Trading System began in earnest in 2008. Its price back then was indeed too weak and, thus, ineffective in cutting CO₂ emissions. After reforms and an ever-tightening emissions cap, the system’s price now hovers around $70, helping to drive down EU emissions.

Sweden’s carbon tax today is set at 1,190 Swedish Krona or $135 per ton, the highest in the world and much closer to where prices should be. But it didn’t start there. When Sweden introduced the tax in 1991, it began at $28 and didn’t rise above $34 until the early 2000s.

Over the years, Austria has seen plenty of plans for what is commonly known as ökosoziale or “eco-social” tax reform. The earliest, in the 1980s, came from the conservative People’s Party. The first concrete proposal for taxing fossil energy in exchange for lowering personal-income and other taxes came in 1991, introduced by Christoph Chorherr, a representative in parliament of the then-fledgling Green Party. By 1998, Chorherr joined forces with party colleague Alexander Van der Bellen, who is now president, to introduce the first CO₂  tax proposal. It took another 23 years, and a coalition of the People’s Party and the Greens, to agree on the tax. Had it been up to the conservatives, the CO₂ tax would be significantly lower still — if there were one at all.

Environmentalists are criticizing this tax as too little and too late —  and blaming “their” party, the Greens. But were it not for this first step now, there would be little hope for a higher price soon.

Look no further than failed U.S. federal climate policy efforts to realize the importance of getting started. In 2009, Greenpeace decried federal efforts to establish a U.S. emissions trading system known as the Waxman-Markey bill as ineffectual and “weak.” The price that such a system would have established hovered somewhere between $20 and $30 per ton of CO₂. The tax currently being discussed in the Senate as part of the reconciliation bill? Fifteen dollars per ton.

It is much harder to go from zero to $35 than it will be to go from $35 to $135, whenever that might be. Hopefully, that will be much sooner than the current schedule promises, largely because the green transition, once kicked off, will create positive feedback loops that build on each other toward a speedier move away from fossil fuels.

Equally important, no climate policy instrument —  whether a tax, an emissions trading system, an efficiency standard or anything short of an outright fossil-fuel ban — can stand on its own.

Austria introduced more than just its carbon tax plans this past week. Climate Minister Leonore Gewessler, whose ministry spans energy, mobility, innovation, and technology, also announced what has become known as the Klimaticket (“climate ticket”): a highly subsidized means to take every train, tram, bus and other public transport throughout the country. The attempt  to get car-addled Austrians to switch to public transit will cost  $1,265 per year or $3.50 per day — even less during the first year.

The jury is out whether the carbon tax or the climate ticket will have a larger effect on CO₂ emissions in the country. For one, the climate ticket is a done deal. The carbon tax still needs to pass parliament. That wouldn’t be a problem under normal circumstances, as the coalition government holds a majority there. But the corruption probe ensnaring conservative Chancellor Sebastian Kurz may yet prevent passage. At least as important, it’s clear that achieving decarbonization goals takes both taxes and subsidies — and much, much more.

Gernot Wagner writes the Risky Climate column for Bloomberg Green. He teaches at New York University. His book “Geoengineering: the Gamble” is out this fall. Follow him on Twitter: @GernotWagner. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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