EC'S CARBON TAX SEEN YIELDING LITTLE EFFECT

A proposed carbon tax may reduce European Community demand for petroleum products by only 0.2%/year to 2000. Christopher Holmes, senior consultant with Gaffney, Cline & Associates in the U.K., said the likely result of the tax is not what the EC intended or even hoped. Even with the tax, demand for products will grow an average 0.6-0.8%/year to 2000, he told a conference on developments in the international energy marketplace.

Dec. 23, 1991

3 min read

A proposed carbon tax may reduce European Community demand for petroleum products by only 0.2%/year to 2000.

Christopher Holmes, senior consultant with Gaffney, Cline & Associates in the U.K., said the likely result of the tax is not what the EC intended or even hoped.

Even with the tax, demand for products will grow an average 0.6-0.8%/year to 2000, he told a conference on developments in the international energy marketplace.

To help European countries stabilize carbon dioxide emissions at the 1990 level by the end of the century, the commission of the EC proposed a tax equal to $3/bbl of oil equivalent (BOE) starting in 1993.

It would increase by $1/BOE/year to a ceiling of $10/BOE by 2000.

The effect of the energy tax on refined products demand in the EC, excluding the former East Germany, was assessed at an average base economic growth rate of 2.7% and an oil price of $22/bbl, increasing with inflation.

BREAKOUT OF PRODUCTS

Gasoline demand will be down by about 0.5% in 2000 because in most EC countries the fuel is already heavily taxed, accounting for more than 70% of the retail price in France and Italy.

The effect on less heavily taxed diesel will be greater, Holmes said, with a 2% reduction in demand by 2000. Jet kerosine demand will be cut 1-1.5% because higher aviation fuel prices are inevitably passed on to consumers, causing a drop in air travel.

The effect of the tax on heating and fuel oil will be more pronounced. That's because lower consumer prices, compared with transport fuels, ensure that the proportional effect of the tax will be greater.

EFFECT ON REFINERS

Looking at the wider picture for refiners, Holmes said distillation capacity in the EC could be severely restricted by the mid-1990s.

High middle distillate growth rates will cause concern because the region depends heavily on imports, particularly from the Soviet Union where export volumes are coming under increasing pressure from a declining production base.

Holmes said with the continuing demand trend from the heavier to the lighter end of the barrel and a slight decrease in gravity of feedstocks, outlays of $2.5-3 billion will be needed in fuel oil upgrading capacity.

The evolution of product specifications also will have a major effect on plans for capital investment with a further $1.2 billion required for octane enhancement and $44.5 billion for distillate desulfurization.

The level of investment in EC refineries during the next decade will be significant in a sector with a poor profitability track record, historically returning only 5% on investment.

The quantity of funds required in the industry today and in the future may well force some of the small refineries into closure as the justification of such a level of investment on a per barrel processed basis may be difficult.

Holmes said, "Ultimately, with different company operating divisions competing for capital investment funds, only larger integrated oil companies are likely to be able to afford to stay in the business."

A potential source of capital may be one or more members of the Organization of Petroleum Exporting Countries whose investment in the North American and European downstream sectors is a strategic goal.

"These countries will have to take a long term, selective view as to the viability, with its associate cost and risk, of maintaining or even increasing their significant presence in.the downstream industry in Europe," Holmes said.