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Austria follows Germany with carbon price for vehicle, heating fuels

06 October 2021 Cristina Brooks

Austria has copied Germany by putting a price on the CO2 emissions created by driving vehicles and heating buildings, although activists say it is too low to be effective.

On 3 October, the governing coalition of the conservative People's Party and the Greens announced they had agreed on a so-called "eco-social tax reform" for the federal budget set to be presented to parliament next week. The reform will gradually come into force starting on 1 January 2022 and adjust taxes for economic, environmental, and social aims.

It not only introduces a new carbon tax, but it also reduces other taxes and duties by €18 billion ($20.8 billion) by 2025. In a statement, legislators said the tax cuts on items such as social security contributions, wages, and income are designed to provide relief for people on smaller incomes, such as retirees, and make the Austrian economy more competitive.

The CO2 pricing kicks off in 2022 at €30 per metric ton (mt) of CO2, rising to €55 in 2025. After this, it will be set by an EU-wide market for such emissions expected to be introduced the following year.

Revenue from the Austrian carbon tax will flow into a subsidy, providing €100-200 per year of relief for households.

"The tax reform brings noticeable tax relief for companies and their employees as well as greening the tax system through the introduction of CO2 pricing," the Austrian Chamber of Commerce said in a statement.

Offering the counterpoint to this view, the NGO WWF argued Austria's debut carbon price would be ineffective in reducing emissions in a 2020 position paper. It cited the collective Scientists for Future, which recommended a tax of at least €50/mt C02 in 2020 and €130/mt CO2 in 2030 to decarbonize the vehicle and heating sectors and recommended a CO2 price of at least €150 by 2025 and then €300 by 2030.

The move comes after government subsidies intended to salvage pandemic-hit European economies triggered calls for greener rebuilding.

Tax on carbon

"The tax reform brings the relief that our companies and their employees urgently need for a sustainable upswing. The investment activity of companies will also be strengthened with the introduction of an investment allowance," said Chamber of Commerce President Harald Mahrer.

Already, Austria has a largely decarbonized power mix thanks to a fleet of hydropower plants that provide most of its electricity, according to IHS Markit analysts.

The government intends to take this further by sourcing the country's entire power supply from renewables by 2030. IHS Markit experts say this requires a 27 TWh expansion of the country' renewables capacity, encompassing 11 TWh of photovoltaic solar, 10 TWh of wind, 5 TWh of hydropower, and 1 TWh of biomass.

Austria's carbon tax is focused on emissions caused by fuel used in heating and transportation, which is different to the focus of the parallel, EU-wide system, the EU Emissions Trading System (ETS) that runs in member states including Austria. The EU ETS focuses solely on industrial and power emissions.

However, Austria's carbon tax prepares the country for inclusion in the EU's second ETS which is focused on the heating and transportation sectors from 2026, proposed within the Commission's carbon neutrality legislation package, "Fit for 55."

The gradual rise in carbon prices takes a page from Germany's national ETS, created under the Combustibles Emissions Trading Act (BHEG) in December 2019, from which fuel suppliers and metal producers were set to get financial relief. BHEG trading started this year at €25/mt CO2 equivalent.

Like that rule, the Austrian tax reform introduces financial relief to prevent offshoring of carbon-intensive activities, or "carbon leakage." In the Austrian version, companies whose fuel costs make up a large share of overall business costs and compensation, plus those companies unable to switch to CO2-neutral alternatives, will get relief.

Domestic consumers are cushioned from the tax rise by a rebate that varies by region, and takes into account whether public transportation is available instead of private vehicle transport.

Subsidy a remedy

Beyond offsetting the environmental measures, Austria granted more tax exemptions for families with children, as well as for companies with employees that will see "both employers and employees benefit," according to the Chamber of Commerce.

Spurring companies to make environmental investments, the government has also granted some tax exemptions on green investments.

Another bonus for greening companies is the addition of an electricity tax exemption for those that install renewable energy. This rule encompasses "all renewable forms of electricity," but in particular hydropower, wind power, and biogas.

Within the wider EU, the expected launch of the second EU ETS for vehicles and heating fuel will be accompanied by a similar subsidy supporting consumers, the Social Climate Fund, the likes of which the WWF acknowledged was a "remedy" for social unrest.

France's "Yellow Vest" protest movement in 2018 led to President Emmanuel Macron's withdrawal of a similar environmental tax paid by consumers of diesel and gasoline.

Posted 06 October 2021 by Cristina Brooks, Senior Journalist, Climate & Sustainability, IHS Markit

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