77
annum SIRA Consulting, 2004. The ‘fixed cost therefore totals €9 million per annum.
Both the cost to the government and the administrative cost are estimated for all Dutch companies participating in the European CO
2
emissions trading system. This includes energy not generated for the manufacturing sector for example energy consumed by households.
To estimate the cost to the manufacturing sector only, the figures above should be multiplied by 0.70.
53
This produces a cost of €6.3 million per annum. In addition, the companies incur investment costs: the net annual
cost of investing in energy saving measures for the CO
2
emissions trading system. These investments are the active ingredient: the higher they are
relative to the overhead cost, the better the system does what it is intended to do.
Assuming that entrepreneurs act rationally, at the current price of an emission allowance, about €20 per tonne, they will take a package of
measures that costs between virtually nil and €20 per tonne of CO
2
saved. Averaged across all the companies and all the additional measures taken as a result of the emission allowances, the investment cost will lie
in the middle between €0 and the amount above which investments are loss-
making, i.e. the investment cost is equal to €10 per tonne of CO
2
saved. The manufacturing sector emits about 56 Mtonnes of CO
2
per annum.
54
The calculated decline in demand lies between 0.1 and 1, equal to between 0.06 and 0.6 Mtonnes of CO
2.
The annual investment cost on account of CO
2
emissions trading is therefore between €0.6 and €6 million. Added to the fixed cost to the government and the
administrative cost to industry together €6.3 million, this brings the total to between €6.9 million and €12.3 million.
Since the system is intended to remain in operation for a long period of time, it is necessary to calculate the cost of the notional situation in
which the CO
2
emissions trading system had already been in existence for 20 years or so in 2008. The reduction in energy consumption and thus in
emissions would then amount to between 2 and 4 price elasticity of 0.1 to 0.2 with a price incentive of 20. With an emission of 56 Mtonnes
per annum, this represents a CO
2
reduction of 1 to 2 Mtonnes. If the price
53
The verified emission of all the Dutch participants in the trading system amounted to 80 Mtonnes in 2008. The manufacturing sector accounted for half, power stations for the other half. Of the
electricity generated, 40 was consumed by the manufacturing sector. The manufacturing sectors total share of the emission was therefore 70 the direct half plus 40 of the other half of
electricity generation.
54
This is the verified emission of all Dutch participants in the emissions trading system, 80 Mtonnes times 0.70.
78
of an emission allowance remains unchanged €20 per tonne, the average annual investment cost would still be about €10 per tonne and
thus come to between €10 million and €20 million. Added to the fixed
cost to the government and the administrative cost to the industry together €6.3 million, the cost then comes to between €16.3 million
if energy consumption and emissions are 2 less than without the CO
2
emissions trading system, i.e. 18 PJ lower and €26.3 million if energy consumption and emissions are 4 less than without the CO
2
emissions trading system, i.e. 36 PJ less.
Cost effectiveness of the CO
2
emissions trading system In the short term, the cost benefit ratio is between €1.4GJ and €6.9GJ
in the most favourable scena rio €12.3 million for 9 PJ, in the least
favourable scenario €6.9 million for 1 PJ. As already noted, this gives a distorted picture if we do not take account of the instruments long-term
operation. In the most favourable scenario, as noted, the cost amounts to €26.3 million for a saving of 36 PJ, equal to €0.70 per GJ. In the least
favourable scenario the cost is €16.3 million for a saving of 18 PJ, equal to €0.90 per GJ. A calculation using the long-term price elasticity also
shows that the European CO
2
emissions trading system is about twice as expensive as the Energy Investment Allowance EIA, which is also far
simpler to implement. This conclusion is valid only as long as the price of an emission allowance remains low relative to the price of fuel a s noted
above, about 20 of the price of oil. Comments
We noted in chapter 4 that emissions trading had a negative interaction with other instruments to reduce CO
2
emissions and that policy was consequently less effective. These consequences are not included in the
calculation of the impact of emissions trading or of the other instruments. The relatively substantial transfer of money in the CO
2
emissions trading system from citizens to the manufacturing sector is not important to cost
effectiveness but is important to the allocation of costs. Since the manufacturing sector received by far the majority of the allowances free
of charge and their value has often been factored into the prices, the sector receives money when it has not actually incurred costs
55
Sijm Van Dril, 2003. In the cost benefit analysis conducted on our behalf
Davidson et al., 2011, this cost is estimated at €800 million per annum 80 Mtonnes freely received CO
2
allowances with a market value of approximately €20 per tonne, half of which is factored into prices.
This transfer of costs can be limited in part by auctioning the allowances
55
The free allowances have a market value.
79
where possible. In an auction, companies must pay for the allowances and thus incur costs. This is one of the reasons why the government
decided in 2007 that the allowances would be auctioned wherever possible House of Representatives, 2008a.
5.5.8 Costs and benefits of energy tax
Does energy tax work? Our survey found no direct indications that energy tax encouraged energy
savings. No comparison can be made between participants and non- participants. No taxpayer is fully exempt from energy tax; only partial
exemption is available but a comparison would be pointless because the companies that enjoy a partial exemption in brief, the very large energy
consumers are not comparable with those without an exemption. We found no study that had considered this issue. As long as
entrepreneurs act rationally, however, it can be assumed that an increase in prices due to energy tax will encourage energy savings.
How much energy has energy tax saved? The average price increase to the manufacturing sector due to energy tax
in comparison with the situation without energy tax is about 8.
56
Energy tax has been in existence long enough and is stable enough for the long-term price elasticity for energy saving to be applicable: 0.1 to
0.2. This results in an energy saving of 0.8 to 1.6. The manufacturing sector consumed 900 PJ excluding feedstocks in 2008. Without energy
tax, therefore, its consumption would have been 7 to 14 PJ higher. Cost of energy savings
Energy tax generates income for the government and costs companies about the same amount. In 2008 there was a tran
sfer of €425 million. The collection cost to the government and the administrative cost to
industry are thought to be negligible and are not taken into account here. The direct cost incurred by companies to invest in energy saving and thus
avoid energy tax can be estimated for all companies on average at half of the additional price incentive see section 5.5.1. Since this price
incentive the marginal rate of energy tax differs widely between the various categories of wholesale and retail consumers, a rough estimate
must be based on the total energy tax. In 2008, this cost to the manufacturing sector was €425 million, after an estimated saving of
56
Calculated for this audit by CE Delft using data from the CBS Statline: the fuel levies charged by power stations plus energy tax relative to total energy costs in the period 1995 -2008. For the
complete calculation, see Davidson et al., 2011.
80
between 0.8 and 1.6. With a saving of 0.8, the manufacturing sector would have avoided approximately €3.4 million in energy tax and
with a saving of 1.6 approximately €6.8 million. If the companies calculate rationally, the annual cost they incur for these investments will
not be higher than the energy tax avoided. On average, the companies incur an annual investment cost just in-between nil and the tax avoided,
i.e. a cost of between €1.7 million for a saving of 7 PJ and €3.4 million for a saving of 14 PJ.
Our survey prompted us to question the assumption that small companies actually take the viable saving measures in response to energy tax. In the
survey, small companies indicated more often than large companies that they did not have enough information to acquire energy efficient
technology. Small companies were also less actively involved in energy saving. This means that small companies probably do not invest up to
half of their tax rate in energy saving measures. The effect and also the cost per unit of energy saved would then be lower than assumed above.
Cost effectiveness of energy tax By means of this rough calculation and ignoring the cost of collecting the
tax, cost effectiveness comes to about €0.24 per GJ: the net annual cost of the induced investments is the only significant item and, as noted
above, amounts to between €1.7 million for a saving of 7 PJ and €3.4 million for a saving of 14 PJ. Taken over all the tariff groups, this is an
inexpensive instrument, cheaper than the EIA, but it also has less effect. To increase the effect, the tax rates should be raised so that companies
also take more expensive measures. The cost benefit ratio of the instrument, however, would then be less favourable.
Comment The estimate above is based on the total energy tax the manufacturing
sector pays and on the assumption that it is shared evenly. In reality, however, energy tax has many different tax brackets, like income tax but
in reverse: the higher the consumption, the lower the marginal rate. This is true of both gas and electricity. Small and medium-sized enterprises,
for example, usually consume no more than 50,000 kWh of electricity per annum, on which they pay €3.70 in energy tax per GJ. Very big
companies consume more than 10 million kWh per annum and pay €0.06 per GJ in the top bracket. Energy intensive companies participating in the
Benchmarking Agreement actually paid no tax on their consumption in excess of 10 million kWh. The same is true of participants in its
successor, the MEE Agreement. The cost effectiveness of each bracket can be approximated as being half the rate. Since wholesale consumers
81
pay little energy tax in the highest bracket, the tax encourages them to take only relatively inexpensive measures. Companies that consume more
than 10 million m
3
of natural gas per annum, for example, pay €0.20 per GJ in 2008. Saving measures that reduce gas consumption but cost
more than €0.20 per GJ are not financially interesting. Retail consumers, by contrast, are encouraged to take more expensive measures because
they pay far more energy tax per unit of consumption. Companies that consume between 5,000 and 170,000 m
3
of gas per annum, for example, pay €4.30 per GJ in energy tax. Whereas wholesale consumers will not
take gas saving measures that cost, for instance, €1 per GJ saved, retail consumers will consider measures costing as much as €3 or €4 per GJ
saved. Large consumers therefore do not take many relatively inexpensive measures while the high rates prompt retail consumers to
take expensive measures. With a view to national costs, this means that energy tax leads to unnecessarily expensive measures. The cost benefit
ratio is therefore less favourable than the estimated €0.24 per GJ and would be more favourable if the tax were distributed more evenly.
5.6 Synthesis of costs and benefits
Government policy has not prompted the manufacturing sector to make a large saving in its energy consumption during the period audited. We
investigated how much energy the individual policy instruments had saved and at what national cost. In view of the inevitable uncertainties
inherent in the assumptions, only relative indications are given here see table 6.
Table 6. Saving and the cost benefit ratio per GJ by instrument investigated in the period 1995-2008
Saving PJ relative to other instruments
Cost benefit ratio
Energy Investment Allowance EIA High
Moderate Energy tax
Moderate Favourable
CO
2
emissions trading system Low
Unfavourable Environmental Management Act
Limited Unknown
Benchmarking Agreement Very unfavourable
Multiyear Agreements MJA2 Unknown
Very unfavourable Source: Study conducted by CE Delft for the Netherlands Court of Audit. For underlying
figures, see audit methodology.
