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A Prospective Fiscal Charge on Fuel Products: Carbon Pricing - Muhammet Ali Ateş

The steep increase in demand in the post-COVID-19 period and the uncertainty caused by the Russia-Ukraine war brought an unprecedented surge in energy commodity prices. Crude oil prices were also affected by this uptrend, and as a result, fuel prices reached record levels in Turkey and all over the world. It is possible to explain the high level of fuel prices reached today basically with the world's current political and economic conditions. However, the new financial obligations imposed on fossil fuels in the coming years within the scope of tackling climate change indicate that fuel prices may remain at high levels in the medium-long term as today.

The transportation sector, in which fuel products are used the most, is the second sector that causes the most carbon emissions only after the electricity and heat generation sector. For this reason, to mitigate carbon emissions in the transportation sector, some countries have already introduced carbon pricing on fuel products.

In principle, carbon pricing can be done either by levying a tax (carbon tax) on the sector or product that causes carbon emissions or by subjecting those to the emission trading system. Whether through taxation or an emission trading system, a financial burden is added to the price of fuel products, and in this way, usage of these products is discouraged. Instead, other alternatives which emit less or no CO2, such as electric vehicles, are desired to become common.

Although the number of countries applying carbon tax for various sectors and products that cause carbon emissions is quite high, the number of countries applying carbon tax directly for fuel products is limited. Nevertheless, the OECD treats special consumption taxes on fuels like a carbon tax. Indeed, the tax imposed on fuel products, whether called carbon tax or otherwise, increases the price of the product on which it is imposed and is expected to decrease the demand in one way or another. From this point of view, it is possible to say that carbon pricing on fuel prices is quite common, albeit implicitly, since fuel products are subject to special consumption tax in many countries worldwide. For example, among the countries that apply tax directly under the name of "carbon tax," countries such as France, Luxembourg, Ireland, and Mexico can be mentioned. In France, the tax amount, which started at 7 EUR/tCO2 in 2014, is currently at 44.67 EUR/tCO2. Luxembourg introduced the carbon tax at the beginning of 2021, and the tax amount is 31.56 EUR/tCO2 for gasoline, 34.16 EUR/tCO2 for diesel, and 20 EUR/tCO2 for other fuel products. In Ireland, the current amount of the tax (33.5 EUR/tCO2 on gasoline and diesel) is planned to be increased to 100 EUR/tCO2 by 2030.

Regarding emission trading systems, these systems currently cover mostly electricity and heat generation plants and some other energy-intensive industrial sectors around the world. However, apart from these sectors, some countries are also implementing or planning to implement emission trading systems for fuel products. For example, with the Law on the Trade of National Certificates for Fuel Emissions (Brennstoffemissionshandelsgesetz -BEHG) adopted in Germany at the end of 2019, it is foreseen to establish a national emissions trading system for fuels used in the road transportation sector and buildings. Thus, in Germany, besides the emissions trading system at the EU level covers electricity and heat generation, industry, and aviation sectors, a separate emissions trading system at the national level for the fuels used in the road transportation sector and buildings. The system was introduced at the beginning of 2021. Accordingly, for fuels used in road transportation and buildings (such as gasoline, diesel, natural gas, fuel oil, and liquefied petroleum gas), suppliers of those fuels are obliged to purchase an emission certificate in return for each ton of CO2 emitted by fuels they place on the market. A transition period has been foreseen in the system, and certificate prices have been fixed for the first five years (2021-2025), increasing each year. The certificate prices foreseen for the transition period and their approximate effect on the liter price of gasoline and diesel fuels (including 19 % VAT) are shown in the table below (Approximately 2.35 kg of CO2 is emitted by burning 1 liter of gasoline mixed with air, and 2.65 kg of CO2 1 liter of diesel).

Source: ADAC

Moreover, a fixed price corridor (55-65 EUR/ tCO2) has been determined for 2026. It has been regulated that from 2027 onwards, prices will occur according to supply and demand in a tender method, whereby prices may reach higher levels.

Like Germany, the EU is also planning to introduce an emission trading system for fuels used in road transportation and buildings. With the "Fit for 55" package prepared by the EU Commission, in parallel with the emissions trading system currently being implemented in the EU covering the electricity and heat generation, industry, and aviation sectors, an independent EU-level emissions trading system will be established for the fuels used in road transportation and buildings. According to the draft prepared by the EU Commission, the new system is planned to be introduced in 2026 and to work based on reducing the amount of emissions from year to year. Thus, by 2030, it is aimed to reduce the amount of greenhouse gas emissions caused by these fuels by 43% compared to the amount in 2005. In addition, the draft also establishes an aid fund, so-called the "Social Climate Fund," to alleviate the burden that the additional costs of the new system will create on vulnerable segments of society. The draft is expected to be negotiated in the EU Parliament and the EU Council in the coming months.

The legal taxpayers or responsible parties before the tax offices or relevant authorities both in carbon taxes and emissions trading systems are the undertakings placing fuel products on the market. However, since the undertakings placing these products on the market reflect the costs they bear to the price of the products, this burden is carried by the end-users (e.g., vehicle drivers). Ultimately, the end-users are responsible for the CO2 emitted by these fuels.

How the revenues from the carbon tax or the emission trading system will be spent is at the discretion of the relevant state. It is possible to spend them primarily on financing the measures taken within the scope of tackling climate change or reducing the costs of these measures for citizens.

As a result, within the scope of tackling climate change, it is estimated that many states worldwide will impose new financial obligations on fossil fuels used in the transportation sector (and buildings) in the near future. The method for this may be to impose a special carbon tax on the fuels, increase the currently applied special consumption taxes, or subject these products to the emission trading system.


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