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Dutch parliament considering minimum price for industry emitters covered by EU ETS

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The Netherlands is advancing plans for a carbon tax next year for industry installations already covered by the EU ETS. The legislation is designed to provide additional certainty on the carbon price trajectory and support the national emissions reduction target, which the government is concerned may not be achieved with only the price signal from EU ETS.

The bill, submitted to parliament on 15 September 2020, would establish a minimum carbon price starting at €30 in 2021 and rising by €10.56 each year to reach €125 by 2030. The proposal would also establish a system of tradable exemption rights assigned to liable entities based on EU ETS benchmarks. Operators would continue to face their EU ETS obligations.

The Dutch government has committed to reducing industry sector emissions by 59% below 1990 levels by 2030. As outlined in the National Climate Agreement released last year, achieving this target will require an additional 14.3 MtCO2e reduction on top of expected reductions from the EU ETS. The agreement proposed the introduction of national carbon pricing policies for the power and industry sectors. A similar carbon tax bill for the power sector was introduced last year.
 
The carbon tax for the industrial sector would cover 271 installations and 13 waste facilities already regulated under the EU ETS, including industrial heat and combined heat and power (CHP) plants. The rate would not be set in advance but adjusted to implement the fixed minimum price trajectory. It would be calculated as the difference between the minimum price for that year and a benchmark EU allowance (EUA) price based on an average of the observed EUA futures prices. When the benchmark price is above the minimum price, the carbon tax would not be levied.
 
The tax base consists of emissions of the liable entities minus their exemption rights. The amount of exemption rights allocated would be based on EU ETS Phase 4 benchmarks and actual production levels. Historic activity levels (2014-2018) would be used for installations to which fuel and heat benchmarks apply to encourage early action, amongst other reasons. Exemption rights start generous in order to support companies during the COVID-19 economic downturn but are set to decline over time. The bill allows for limited intra-year bilateral trading of exemption rights. 

Through the use of exemptions, the tax only prices the share of additional emissions that industry sectors would need to abate to achieve the 2030 national climate target. Supporting documents of the bill stipulate this design would minimize leakage risks. In addition, there are opportunities for ex post reduction of tax liabilities through rebates for overachievers. Rebates can be claimed up to five years back at the tax rate of the corresponding year. This is intended to reassure industry participants, some of whom have voiced concerns over the price trajectory’s potential impact on their competitiveness. 
 
The tax is expected to have a limited impact initially due to the generous exemptions granted in the early years. However, the Dutch government expects the tax will support greater low-carbon investments in the second half of the decade as a result of the rising minimum price and declining exemptions in line with prescribed annual reductions in the level of exemption rights.
 
Alongside the carbon tax for industry, the Dutch government is in the process of implementing a minimum carbon price for power generators starting at €12.30 in 2020 and rising to €31.90 in 2030. Whereas the carbon price for electricity generation would have no real effect if EUA prices remain at their current level, the pricing scheme for industry is specifically designed to drive additional abatement in line with the steep emissions reduction pathway envisioned in the 2030 national climate target.
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