As part of the European Green Deal, the EU has set out ambitious targets to tackle climate change and foster a cleaner environment, aiming for a 55% reduction in greenhouse gas emissions by 2030 and to become a climate-neutral continent by 2050.
As we work towards these objectives, green taxation can play an active and positive role in support of other EU climate and energy policies such as the EU Emission Trading System.
What is green taxation?
Environmental or green taxes include taxes on energy, transport, pollution and resources. Energy taxes are taxes on energy products and electricity used for transport, such as petrol and diesel, and for other purposes, such as fuel oils, natural gas, coal and electricity used in heating.
As part of a broader policy mix, green taxation initiatives at both EU and Member State level can help us to reach our environmental policy goals by encouraging a switch to cleaner energy, more sustainable industry and greener habits. By setting a price for social costs, altering decision-making and incentivising behavioural changes by companies and people, this action can help mitigate resource waste and damage to the environment.
Green taxation can also help promote sustainable growth, support intergenerational fairness and maintain tax revenue levels for EU Member States while allowing them to cut other, more distortive, taxes such as those on labour. Finally, and since the EU Green Deal is also the EU’s growth strategy, green taxation can help reboot the EU’s economy as we recover from the COVID-19 pandemic.
The transition towards climate neutrality requires deep societal change. In that sense, green taxation must fit into a wider policy context that integrates a broad range of instruments, such as pricing instruments, subsidies, standards and investment in public infrastructure. National environmental taxes could also address specific environmental issues in each individual Member State.
That said, to ensure social fairness, the effect of green taxation should be most felt by the social actors that consume the most. It should also be matched with support for the most vulnerable and infrastructure investments, such as public transport.
Green Taxation: supporting the recovery
The recovery from the COVID-19 pandemic must be green, and in that context, the EU’s flagship Recovery and Resilience Facility (RRF) provides an opportunity to extend the scope and use of environmental taxes. As the EU’s mid- to long-term response to the crisis, the RRF aims to make EU economies more sustainable, resilient and better prepared for the challenges and opportunities of the green and digital transitions, while ensuring that these transitions are just and fair.
Since the consequences of pollution often hit low-income households hardest, addressing pollution through taxes and market-based instruments, with careful consideration of how they filter down to citizens, could improve fairness in our societies.
The Commission therefore encourages Member States, as part of their national recovery efforts, to design appropriate green taxes that can raise much-needed revenue and remove fossil-fuel subsidies, while making sure that it is those who pollute or waste the most that bear the consequences of their actions (the ‘polluter pays’ principle).
Revision of the Energy Taxation Directive
The EU’s Energy Taxation Directive lays down rules for the taxation of energy products used as motor fuel, heating fuel and electricity. Last updated in 2003, however, the Directive is no longer aligned with the EU’s regulatory framework and policy objectives in the area of climate and energy. For example, there is no link between the minimum tax rates of fuels and their energy content or CO2 emissions. Nor does the Directive reflect the current mix of energy products on the market in the EU.
A 2019 evaluation of the rules also indicated that the current mandatory tax exemption for fuel used in international aviation and maritime transport does not match EU climate objectives since it does not take into account its impact on the environment. At the same time, the exemption can increase the tax burden for other sectors and private households, while bringing about an uneven playing field between different modes of transport.
The Commission is currently undertaking a revision of the Energy Taxation Directive, to overhaul the way in which energy products are taxed in the EU and to make sure that it better reflects the EU's climate ambitions.
This includes revising minimum rates for fuels and re-thinking tax exemptions that imply de facto subsidies for certain fossil fuels and certain economic sectors. The aim is to shape energy taxation in a way that encourages both businesses and consumers to behave in a more environmentally-friendly way.
- Commission study on taxation in support of green transition
This study defines a set of concrete policy recommendations for national tax systems to enhance efforts to reduce greenhouse gas emissions in the EU effectively.
- Commission study on energy taxation indicators
This study assesses indicators of energy taxation and formulates recommendations on how to improve them, in view of European policy priorities, including the Green Deal and the European Semester process.
- Joint Research Centre (JRC) report on energy taxation and its societal effects
This report finds that the redistribution of environmental tax revenue can help support households facing increasing energy and transport costs.