Including Consumption in the EU ETS: Administrative Implementation of a Consumption Based Charge

Abstract

The “Inclusion of Consumption in EU ETS” is currently gaining traction as a new approach to address carbon leakage and improve the effectiveness of the EU ETS, within legal and political constraints. It complements the current approach of coverage of emissions by upstream installations where trade exposed sectors at risk of leakage, such as steel and clinker, receive free allowances. In order to ensure the recovery of carbon costs from consumers, we propose the introduction of a complementing second pillar. This would be facilitated by adding a consumption‐based charge to the EU ETS directive (the Charge). The Charge would be based on the EU ETS permit price and the benchmark employed for the allocation of free allowances. It would be levied when carbon intensive goods are released for consumption. Funds raised would be assigned to national trusts, which would be strictly separated from the national budget. This report provides a blue print for the administration and control of the “Inclusion of Consumption”. The proposed approach builds from the administration of other consumption based levies including excise and Value Added Tax (VAT). The research has been informed via a literature review, case studies with businesses that produce excisable goods as well as interviews with public authorities, academics and excise administration experts. Importantly, the intent is not to design an all-encompassing administrative framework, but rather to demonstrate how such a system may function. The critical elements of the approach are outlined below and expanded on in the course of the report.