It sounds like a not very useful idea: to put your own dirty industry under heavy tax burden on carbon dioxide emissions. That makes production more expensive, exports will fall, companies may go abroad. It will be good for the climate, but the EU will disadvantage itself by following that path.

However, it is not that simple. For the European economy, the consequences of a CO2 tax of 50 euros per ton can be overseen, according to De Nederlandsche Bank in a study published this week. If you do it smartly, the economy can even grow slightly, household incomes increase and unemployment will fall.

The CO2 levy is on the table because extra measures are needed to achieve a goal from the proposed Climate Act: 49 percent less greenhouse gases emitted in 2030. The Netherlands is not yet on course and that has to do with the industry, which heavily relies on fossil energy.

Dutch companies emit a lot of CO2 per euro earned compared to other countries. This is due to the type of industry, such as chemistry, metal and refining, but also due to the specific activities within these industries, such as making steel from iron ore. The transport sector also emits more CO2 than in other countries due to the high share of shipping and aviation.

The industry and energy sector already pay for emissions. This is done via the European ETS emission trading system. But transport and agriculture are not covered. In addition, companies pay for energy and deduct energy taxes, a kind of indirect tax on emissions. If you add up all those costs, it appears that Dutch industry is not shifting internationally for emissions. The trade price for CO2 is now around 20 euros per ton and the taxes are relatively small for large users of energy.

Large companies in the Netherlands therefore emit a relatively large amount and pay less for this than in other European countries. That fact, plus the observation that the 20 euro per tonne does not cover the social costs of emissions by far, are good reasons to introduce a CO2 tax in the Netherlands, according to De Nederlandsche Bank (DNB), on top of the trading system.

CO2 tax must apply to the whole EU. That would also be the royal road, as DNB calls it. But there are already a lot of crazy greenies, also close by. For example, France, Norway, Switzerland, Finland and Sweden already have their own CO2 tax or advanced plans for this. Worldwide there are seventy countries or regions where emissions are extra burdened. This gives companies a stronger incentive to switch to green technology.

Of course it hurts, the central bank acknowledges. At a levy of € 50 per ton for the entire Dutch business community, the production costs in the chemical industry go up by 2.5 percent, in the base metal by 3.9 percent and in the mineral extraction by 4.4 percent.

Suppose that companies fully pass on extra costs in their product – the worst-case scenario – then they deteriorate their competitive position, sales will drop by a few percent, in some specific branches even more.

A European levy makes things less bad, but even then, for example, the chemical industry loses competitiveness. The opposite applies to agriculture, because the Netherlands produces just that with less carbon.

Slight shrinkage

Some sectors are suffering, for the economy as a whole the consequences of an own CO2 tax are limited: the GDP drops by 0.9% after five years. This slight decline in the economy occurs when all the proceeds from the CO2 tax end up in the treasury and then nothing special happens. Suppose now, says De Nederlandsche Bank, that we reduce the income tax with that bag of euros.

Not a crazy idea because the energy taxes for small consumers and consumers are relatively high and there are also concerns that they will rise further with the greening of the economy. For the economy as a whole, this appears to be a useful expenditure. As a result, the economy is growing slightly, households have more to spend and unemployment is falling.
Allowance

It is also possible to return the money to companies in the form of a reduction of the profit tax. This is especially good for investments, but the economy yields less. Another option is to meet the affected industry with a clean technology development fund. Using hydrogen as an energy source, or financing projects for the capture and use of CO2 that do not get off the ground.

Is 50 euros enough to meet the climate goals? No, according to De Nederlandsche Bank. But it is a beginning that is economically very defensible, the conclusion is.