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: Energy & Climate

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 communication@bruegel.org.

View comments
Read article Download PDF More on this topic

Book/Special report

Developing the EU long term climate strategy

To ensure that EU climate policy is in line with the goals of the Paris Agreement, and takes into account substantial recent shifts in the technical and political framework, the EU needs a new long-term climate strategy that will supersede the 2050 Roadmap that was issued in 2011.

By: Georg Zachmann and Andrei Marcu Topic: Energy & Climate Date: April 18, 2018
Read article Download PDF More on this topic

Policy Brief

Addressing Europe’s failure to clean up the transport sector

The European Union has the long-term vision to reduce its greenhouse gas emissions by 80-95 percent by 2050 compared to 1990 and it adopted in 2014 a binding 40 percent emissions reduction target to be achieved by 2030. Transport is therefore set to become the main obstacle to the achievement of the EU’s decarbonisation goals.

By: Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate Date: April 9, 2018
Read article More on this topic More by this author

Podcast

Podcast

Brexit consequences for EU climate and energy policy

Bruegel fellow Georg Zachmann joins Richard Tol, professor in the Department of Economics at the University of Sussex, and Pieter-Willem Lemmens, head of analysis at the climate policy think-tank Sandbag, for this episode of 'The Sound of Economics', to discuss the impact of Brexit on climate and energy policy in the European Union.

By: The Sound of Economics Topic: Energy & Climate Date: February 15, 2018
Read about event More on this topic

Past Event

Past Event

Impact of Brexit on the EU energy system

This meeting will build on Bruegel’s recent report for the European Parliament (link) and will consist of two sessions. The first session will discuss the impact of Brexit on the EU energy sector, with a special focus on the consequences of Brexit for the Irish energy system. The second session will look at the impact of Brexit in terms of […]

Speakers: Georg Zachmann, Richard Tol and Pieter-Willem Lemmens Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 8, 2018
Read article More on this topic More by this author

Blog Post

EU budget: Expectations vs reality

The public's impressions of where money is spent in the European Union can often be wide of the mark. But whether this is a result of wishful thinking or just a lack of information remains unclear.

By: Yana Myachenkova Topic: European Macroeconomics & Governance Date: January 29, 2018
Read about event More on this topic

Past Event

Past Event

EU long term climate change strategy

This meeting, which will take place in Czestochowa, is part of the project “Developing the EU long-term climate strategy”.

Topic: Energy & Climate Location: Czestochowa, Poland Date: January 29, 2018
Read about event More on this topic

Past Event

Past Event

EU Long Term Climate Change Strategy

This meeting, which will take place in Copenhagen, is part of the project “Developing the EU long-term climate strategy".

Topic: Energy & Climate Location: Copenhagen, Denmark Date: January 26, 2018
Read about event More on this topic

Past Event

Past Event

Energy digitalization: challenges and opportunities for the industry

What are the the industrial implications of Europe’s digital energy revolution? What new business models do we need to make the best of it? What policy frameworks do we need to facilitate this development?

Speakers: Laura Cozzi, Jean Jacques Marchais, Hans Nieman, Mark van Stiphout and Simone Tagliapietra Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 17, 2018
Read article Download PDF

External Publication

European Parliament

The Impact of Brexit on the EU Energy System

What will be the impact of Brexit on the EU energy system? With or without the UK, the EU will be able to complete its market, to achieve its climate and energy targets with feasible readjustments, and to maintain supply security

By: Gustav Fredriksson, Alexander Roth, Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, European Parliament, Testimonies Date: December 19, 2017
Read article More on this topic More by this author

Blog Post

Moroccan job market issues, and labour trends in the Middle East and North Africa

Morocco is an interesting case of structural labour market disequilibrium despite respectable growth, and illustrates the issues facing the region’s oil-importer countries

By: Uri Dadush Topic: Global Economics & Governance Date: December 7, 2017
Read article More by this author

Opinion

EU should pay member states to get rid of coal

The European Union should act to ensure the continued transformation of its energy system, and encourage member states to overcome their dependence on coal for supplying electricity. Helping coal-mining regions with the transition should require €150 million per year – a mere 0.1% of the total EU budget – and the EU would not even need to establish a new fund to support it.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: December 5, 2017
Read article Download PDF More by this author

Policy Brief

Beyond coal: facilitating the transition in Europe

Europe has a dirty energy secret: coal is producing a quarter of the electricity, but three-quarters of the emissions. The EU should propose that its member countries speedily phase out coal and put in place a scheme to guarantee the social welfare of coal miners who stand to lose their jobs, making a better use of the European Globalisation Adjustment Fund (EGF)

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: November 23, 2017
Load more posts