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The updated Energy Taxation Directive (ETD) presented by the
European Commission in July, which is in line with the European
Union's ambitious carbon reduction targets, suggests that green
taxes will grow in importance.
While the Commission's proposal highlights that new green taxes
can help countries to maintain revenues while cutting "other, more
distortive, taxes", the substantial deterioration in public
finances due to the pandemic increases the incentives to use
environmental taxes for revenue purposes.
Political support for introducing new or expanding existing
green tax policies continues to vary substantially across the EU at
the national level, and there is a clear risk that for populist and
electoral reasons some EU governments will prove reluctant to
increase environmental taxes.
The proposed shift towards green taxation in EU member states
through the adoption of the updated ETD would also increase the
risk of protests, particularly if there are no measures to mitigate
its impact on the most affected sectors.
Green taxes are expected to play an increasing role over
the medium term
Tax policy is likely to play an important role in EU efforts to
reach its target of reducing carbon emissions by at least 55% by
2030. Receipts from environmental taxes are relatively low in the
EU. As a share of GDP, they range from 3.9% in Greece to 1.4% in
Ireland (although the Irish figures are distorted by the large
share of corporate taxes). In the EU overall, receipts from
environmental taxes, as a share of GDP, are lower now than 20 years
ago.
The EU's ambitious carbon-reduction targets suggest that green
taxes should grow in importance over the two-year horizon. The
European Commission has a clear objective to align EU taxation
regimes with the priority goal under the European Green Deal to
reduce net greenhouse gas emissions to 55% by 2030. The updated
ETD, proposed by the Commission in July 2021, is part of this
effort. While EU member states are free to impose their own level
of taxes, the ETD sets up structural rules and minimum tax rates
for the taxation of energy products (motor fuel, heating fuel, and
electricity). While the updated ETD proposal indicates that
environmental taxes will grow in importance, the shift towards
green taxation is likely to generate uneven changes in tax burdens
across member states. The Commission's ETD proposal highlights that
new green taxes can help countries maintain revenues while cutting
"other, more distortive, taxes", particularly by reducing labor
taxes and social security contributions.
Many of the countries with the most challenging fiscal metrics,
such as Greece, Romania, and France, have pledged to reduce
taxation to support economic recovery and attract investment.
National governments - particularly in such states - will be wary
of a backlash against green policies if these impose substantial
increases in the tax burden, reversing wider policy goals. However,
the viability of fiscal easing plans is questionable given the
recent deterioration of debt sustainability metrics, with such
policies likely to be challenged when the EU increases its focus on
restoring debt sustainability.
ETD and Commission guidance likely to align energy taxes
only after 2024
In general terms, although many governments are willing to
progress theoretically to advance green taxation, in multiple cases
there is a clear risk that for populist and electoral reasons they
will prove reluctant to do so. In several locations, there is also
an elevated risk that various EU member states will attempt to
soften the EU-wide approach.
Lower-income Eastern EU member states that are dependent on coal
such as Poland and Bulgaria, as well as countries such as France
and Belgium, are likely to object to changes that would have an
immediate negative social impact on low-income groups by sharply
increasing fossil fuel prices. Even after adoption, ETD
implementation by member states is likely to remain uneven, with
some countries likely to delay this beyond the required two-year
period for ETD incorporation into national legislation owing to
concerns over social effects.
The ETD is unlikely to be adopted by the end of 2022, thus
unlikely to enter into force in January 2023 as planned, given the
high likelihood of disagreements during the negotiations between
the European Parliament and the Council representing EU member
states.
Varying domestic political support for green taxes and
growing risk of protests
Political support for introducing new or expanding existing
green tax policies continues to vary substantially across the EU at
the national level. There are also significant differences at the
regional and local levels, further complicating the effective
implementation of new EU legislation. Intra-government
disagreements are a further potential obstacle to green taxation,
with many EU countries led by coalitions that include two or more
parties with distinct views on environmental legislation.
The 2021-27 EU budget, together with the NextGenerationEU
recovery package, includes instruments that aim to alleviate the
social impacts of energy transition. The planned Just Transition
Fund (JTF) envisages the allocation of EUR17.5 billion to EU
regions that would be negatively affected, supporting activities
such as the reskilling of workers and improvement of building
energy efficiency. The Commission additionally proposed in July a
new Social Climate Fund, which should be active during 2025-32, to
alleviate the social burden from expanding the ETS to buildings and
road transport. However, variations between EU member states over
the use of such funds are likely to remain problematic, with slower
utilization likely in countries with historically low absorption
rates such as Bulgaria, Romania, and Slovakia.
Posted 26 August 2021 by Bibianna Norek, Research Analyst, Europe & CIS, Country Risk, S&P Global Market Intelligence and
Diego Iscaro, Senior Economist, Europe Economics, S&P Global Market Intelligence and
Dijedon Imeri, Senior Analyst, Country Risk, S&P Global Market Intelligence and
Jan Gerhard, Senior Analyst Country Risk Europe, S&P Global Market Intelligence and
Petya Barzilska, Sr. Research Analyst II, Europe & CIS Country Risk, S&P Global Market Intelligence
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