Options for a CO2-indexed energy tax for green gases

The energy tax currently levied in the Netherlands on the gas and electricity supply makes no distinction between renewable and fossil energy. There is growing interest, however, in carbon-based pricing as a cost-effective instrument for achieving a transition to a climate-neutral energy system. In addition, the government recently proposed introducing a CO2 charge for industry and a minimum CO2 price for the power generation sector. This study investigates the potential and estimated impacts of a CO2-indexed energy tax as a way to make gas use in non-industry sectors more sustainable (industry itself being covered by the EU ETS). In principle, a CO2 price works best if it is uniform across the entire economy. The level of a CO2 charge for gas should therefore be tied to that for electricity.

A CO2-indexed energy tax is feasible as well as desirable, because it would incentivise gas and electricity production technologies with reduced or zero carbon emissions. Based on foreign studies, we conclude that there are two ways to implement a CO2-indexed energy tax:

  1. An at-source tax
  2. A user tax.

Consumers will ultimately pay a CO2-indexed energy tax via their energy bill. At present this also holds for the SDE+ renewable energy subsidy, which is funded from the so-called ODE surcharge on the energy bill. A CO2-indexed energy tax would lead to savings on the SDE+ subsidy budget. Because a CO2-indexed energy tax is ultimately more efficient than a subsidy, this would lower the cost to the consumer.

The energy consumer would benefit in the form of a lower energy bill compared with the situation with a flat-rate energy tax in combination with the ODE surcharge. Income effects for low and middle incomes can be compensated using revenues from the CO2-indexed energy tax.