Opinion

Decarbonisation: a future fiscal headache for Europe?

Energy taxes contribute significantly to public budgets in the EU, but with the aim to reduce greenhouse emissions, the EU will have to fully decarbonise its energy system. However, taxing green energy poses a significant challenge, which could result in a tax revenue gap. Before this becomes a reality, European governments must start looking for alternative sources of public finance.

By: , and Date: October 25, 2016 Topic: Green economy

This op-ed was originally published in Le Monde.

Le-Monde-Logo-1024x227

EU governments face budget hole from decreases in energy tax revenues

If EU countries take their commitment to reducing emissions seriously, decreases in energy consumption could soon result in a tax revenue gap.

Energy taxes contribute significantly to public budgets in the EU. In 2014 governments across Europe received on average 6% of their revenues from taxes on energy. In 2014 the German government collected 48.7 billion euros in energy taxes. In Italy the figure was 47.7 billion, with 40.4 billion in the UK and 34.7 billion in France.

Almost all of this revenue comes from taxes on fossil fuels used for transport, heating and electricity production. But the EU has a long-term aim to reduce greenhouse gas emissions by 80-95% by 2050, compared to 1990 levels. To achieve this target, the EU will have to fully decarbonise its energy system by 2050. This will imply a huge drop in associated energy tax income.

This aim is becoming political reality, so governments need to prepare. At the COP 21 summit in Paris, the EU adopted a binding target to reduce greenhouse gas emissions by 40% by 2030. If this happens, a major source of government revenues will disappear in less than two decades.

Why do governments like energy taxes?

In their current form, taxes on energy are an effective way to collect money. They are difficult to evade. They have advantages over labour taxes, which can encourage illegal work or increase unemployment by making it more expensive to hire people. The EU imports most of its fossil fuels, so a certain share of the tax burden is borne by the countries exporting fuel. And consumption of petrol corresponds almost perfectly to road usage – so taxes at the pump can recover the cost of roads directly from those who use them the most. Finally, energy taxes are environmentally sound. They put a price on the negative effects of energy consumption, such as greenhouse gases, air pollution and noise.

Taxes on green energy are not a suitable substitute. Low-carbon energy, especially electricity from renewable sources, is more difficult to tax because production and transmission are decentralised. Governments find it much easier to track and tax the use of coal in power stations than the micro-generation of electricity, for instance from a domestic solar panel. Moreover, hitting our carbon targets will also require great improvements in energy efficiency – so there will be less energy consumption to tax. But above all, a heavy tax burden on green energy makes no sense. It would work against the transition to low-carbon energy that is so vital to limit global warming.

Change is coming

We have a long way to go before we reach the COP 21 goals, but taxes on energy have already helped reduce energy use and incentivise the shift to renewable energy. In the EU the proportion of electricity produced from wind and solar power has increased from 1% to 12% in the last 15 years.

At the moment we use the bulk of our fossil fuels for transport, but that is also changing. Electric cars are becoming cheaper and more widespread. The Dutch government will discuss plans to ban the sale of petrol and diesel cars completely by 2025.

Of course these changes are welcome from an environmental perspective. But we have to accept that in the longer run energy taxes will gradually erode their own tax base. The same is true for EU carbon pricing. This should complement energy taxes, but ultimately revenues from carbon taxes will fall as emissions are reduced.

As the energy transition gathers pace governments will see their revenues from energy taxes decline. They must find a replacement source of income, otherwise there may be dangerous political disincentives against complete decarbonisation. The time to think about this is now. Before the revenue gap brought by decarbonisation kicks in, European governments must start looking for an alternative, equally effective, source of public finance.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic
 

Upcoming Event

Oct
20
13:00

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Maria Demertzis, Cornelia Holthausen and Jean Pisani-Ferry Topic: Banking and capital markets Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Oct
21
14:00

The contribution of hydrogen to European decarbonisation

What role will hydrogen play in Europe's decarbonisation?

Speakers: Alison Conboy, Andrea Pisano and Georg Zachmann Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article
 

Opinion

Xi’s pledge on financing coal plants overseas misses point

China’s domestic installation of coal-fired power plants continues at great pace.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 7, 2021
Read article More on this topic
 

Opinion

The only quick-fix to Europe’s energy price crisis is saving energy

The only thing Europe can quickly do to prevent a potentially difficult winter is to actively promote energy conservation in both the residential and industrial sectors.

By: Simone Tagliapietra and Georg Zachmann Topic: Green economy Date: October 7, 2021
Read article
 

Opinion

Will China use climate change as a bargaining chip?

Beijing shows signs of changing tactics ahead of the COP26 conference.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 6, 2021
Read article More on this topic
 

Opinion

Letter: The lesson Europe should learn from the gas crisis

Europe’s gas supply security could more effectively be safeguarded by ensuring that unused alternatives are maintained.

By: Simone Tagliapietra and Georg Zachmann Topic: Green economy Date: October 5, 2021
Read article More on this topic
 

Opinion

Can climate change be tackled without ditching economic growth?

The ultimate answer to the question on whether climate change can be tackled without ditching economic growth depends on our willingness to step up climate action massively.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Green economy Date: September 27, 2021
Read article More on this topic
 

External Publication

Winners and losers of energy and climate policy – How can the costs be redistributed?

Who should bear more and who less of the burden achieving climate policy goals?

By: Gustav Fredriksson and Georg Zachmann Topic: Green economy Date: September 24, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Exploding energy prices

Why the sudden spike in European electricity and gas prices?

By: The Sound of Economics Topic: Green economy Date: September 23, 2021
Read article Download PDF More on this topic
 

Working Paper

Can climate change be tackled without ditching economic growth?

The notion of degrowth to reduce greenhouse gas emissions appears unrealistic; decoupling of emissions from growth is in principle possible but requires unprecedented efforts.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Green economy Date: September 16, 2021
Read article More on this topic
 

Blog Post

Is Europe’s gas and electricity price surge a one-off?

Surging natural gas prices in Europe, driven by rising demand and tight supply, are pushing up electricity prices; to prevent volatility, governments need to commit more clearly to a low-carbon future.

By: Simone Tagliapietra and Georg Zachmann Topic: Green economy Date: September 13, 2021
Read article Download PDF
 

Policy Contribution

European governance

A green fiscal pact: climate investment in times of budget consolidation

Increasing green public investment while consolidating deficits will be a central challenge of this decade. A green fiscal pact would address this tension, but difficult trade-offs remain.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: September 9, 2021
Load more posts