Environmental Tax Policy Review of Romania

Annex E. Determining the optimal price

This annex reviews different possible ways of determining the optimal carbon and air pollution price to be used in a tax policy.

A carbon price can be determined using two main approaches. The first estimates the social cost of carbon (SCC), while the second derives the carbon price required to achieve a specific emission reduction target. A recent European Commission study (Mottershead et al., 2021[1]), based on a synthesis of multiple sources, identifies a central SCC value of EUR 100 per tonne of CO₂ through 2030. Alternatively, several modelling studies estimate carbon prices consistent with medium- or long-term climate targets. These estimates depend on assumptions regarding energy price trajectories, the availability and deployment of current and future technologies, the design of complementary policies, and the development of carbon capture and storage (CCS). For the United States, Kaufman et al. (2020[2]) find that carbon prices aligned with 2030 goals should range between EUR 29-55/tCO₂ (USD 34–64/tCO₂) in 2025 and EUR 66-107 (USD 77–124/tCO₂) in 2030.

In a hypothetical policy vacuum (i.e. in the absence of any other policy changes), the model shows that a carbon price of EUR 68 per tonne of CO₂, applied across all energy sources, would be necessary to meet the NECP targets. Figure A E.1, Panel A illustrates the impact of different carbon price levels on CO₂ emissions. The upper bound is represented by the European Commission’s estimate of the social cost of carbon (EUR 100/tCO₂; (Mottershead et al., 2021[1])), while the lower bound reflects the price signal from the ETS2, together with existing excise duties and VAT. The analysis therefore supports the mid-range price of EUR 68/tCO₂ as a level capable of delivering substantial additional CO₂ emission reductions compared with an ETS2-only scenario. It is modelled as top-up carbon price of EUR 68 per tonne of CO₂ from 2026 onwards on all energy products when the ETS2 is below the threshold. Nevertheless, this should be taken with caution, since this is only the case if the carbon price were the only instrument targeting CO₂ emissions. In practice, it will operate alongside complementary measures that could result in additional emission reductions.

While the carbon tax of EUR 68 per tonne of CO₂ across energy products allows, within the model, to meet the NECP target, it is not sufficient to address Romania’s air pollution concern. Figure A E.1, Panel B shows the impact of the different carbon prices on PM_2.5 emissions. A carbon price of EUR 68 per tonne CO₂ following the EU ETS2 design has no impact on air pollution reductions, as it excludes firewood from the tax base. The other two scenarios mitigate air pollution as these include biomass in the tax base, however, they are not sufficient to meet the NEC Directive target.

Figure A E.1. Impact of different carbon prices on CO₂ emissions and PM_2.5 emissions in Romania

As % of 2005 emissions

Note: Scenario 1 models the introduction of the EU ETS2 from 2028, assuming a carbon price of EUR 48 per tonne of CO₂. Scenario 2 assumes a carbon price of EUR 68 per tonne of CO₂ on all energy products. Scenario 3 assumes a carbon price of EUR 100 per tonne of CO₂ on all energy products. All impacts are shown relative to 2005 emission levels.

Source: Author’s elaboration.

In turn, an air pollution tax can internalise the related costs either by setting the rate according to estimated damage costs or by calibrating it to achieve a specific emissions reduction target. The unit damage cost of air pollution (in this case PM₂.₅ emissions) in EUR per kilogram of emissions can be estimated using the following formula:

$\frac{EUR}{{kg}_p}=\mathrm{ }\frac{B_p}{C_p}\mathrm{*}D$

where:

$B_p$ is the annual number of premature deaths attributable to pollutant p, as reported by the European Environment Agency (17 950 per year for PM₂.₅ in 2022).

$C_p$ is the total annual emissions of pollutant p, as reported by Member States under the NEC Directive (107 565 tonnes in 2022).

$D$ is the Value of a Statistical Life (VSL) in euros per premature death (or year of life lost). The European Commission ETD impact assessment uses a VSL of €3 060 000 in 2005 prices. Converted to 2022 prices using the EU-27 Consumer Price Index, this gives €4 362 642 per premature death.

Using this methodology, the average national damage cost of PM₂.₅ emissions in Romania is estimated at EUR 728.02 per kg, compared to the EUR 103.1 per kg benchmark used in the European Commission’s Impact Assessment for a potential air pollution tax in the revised ETD. If introduced, this minimum rate would be binding across the EU, while Member States could set higher rates to reflect national priorities or location-specific factors, such as differentiating between urban and rural emissions. The air pollution tax is not included in the current legislative proposal of the ETD revision.

Table A E.1. Heterogenous social cost of air pollution across Romanian cities

City	Total annual damage (EUR Mio.)	Per capita damage (EUR)	PM2.5 (µg/m³)	Population density
Alba Iulia	71.2	955	14.76	74 574
Arad	192	1 082	17.87	177 464
Baia Mare	124.5	851	13.72	146 241
Bistrita	66.7	710	10.57	93 950
Botosani	124.3	1 028	14.83	120 902
Brasov	495.6	1 710	21.34	289 878
Bucuresti	6345.1	3 004	21.46	2 112 483
Calarasi	77.1	1 009	15.98	76 380
Cluj-Napoca	495.6	1 532	16.93	323 484
Craiova	297.9	984	19.59	302 783
Focsani	73.2	787	12.56	92 936
Galati	186.4	615	13.18	303 069
Giurgui	76.1	1 123	16.34	67 721
Iasi	456.1	1 221	27.01	373 507
Oradea	244.4	1 102	17.44	221 796
Pitesti	140.2	801	11.44	175 047
Ploiesti	311.8	1 358	19.39	229 641
Râmnicu Vâlcea	110.4	935	13.96	118 111
Satu Mare	89	737	10.96	120 736
Suceava	107.6	881	14.87	122 231
Timisoara	542.2	1 643	18.57	330 014

Source: De Bruyn and De Vries (2020[3]).

References

[3] De Bruyn, S. and J. De Vries (2020), Health costs of air pollution in European cities and the linkage with transport, https://cedelft.eu/wp-content/uploads/sites/2/2021/03/CE_Delft_190272_Health_costs_of_air_pollution_in_European_cities_and_the_linkage_with_transport_Def.pdf.

[2] Kaufman, N. et al. (2020), “A near-term to net zero alternative to the social cost of carbon for setting carbon prices”, Natural Climate Change, Vol. 10, pp. 1010-1014.

[1] Mottershead, D. et al. (2021), Green taxation and other economic instruments: Internalising environmental costs to make the polluter pay, https://environment.ec.europa.eu/publications/green-taxation-and-other-economic-instruments-internalising-environmental-costs-make-polluter-pay_en.