EU’s Energy Taxation Directive review crucial to achieving transition to a clean, carbon-free economy

Environmental taxation is about much more than just green taxes, says Spanish S&D MEP César Luena.
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By César Luena

César Luena (ES, S&D) is a vice-chair of Parliament’s Environment, Public Health and Food Safety Committee

04 Mar 2021

When the European Green Deal was announced in December 2019, we lived in a different world. The flagship project of the von der Leyen Commission was born B.C. (before COVID-19), but unlike the many other initiatives and practices that perished before the new reality, the Green Deal is needed now more than ever.

It has also ultimately proved to be the perfect time to achieve Europe’s ambitions and accelerate efforts aimed at achieving climate neutrality and the transition to a green economy. 

The pandemic has given urgency to action and awakened millions of citizens who, all of a sudden, have experienced in practice what it means to live in a global village.

Confined for months, exposed to a cascade of shocking news, populations across the EU have had time to reflect on many issues: from health and public services to the economy and joint recovery.

Well, now it is time to add one more topic to the discussion: taxation. Tax systems play an important role in the distribution of wealth and opportunities, as well as in the maintenance and support of welfare states. Everybody understands this. 

“We have been battling in the European Parliament to get the EU its own sound, significant resources system. And we succeeded”

However, few people are aware these days of how outdated our tax systems have become. I will not dive into the switch from labour to capital in wealth creation, nor into the chunk of real economy that the poorly taxed digital markets represent. But I will tackle here an irrefutable fact enshrined in the EU Treaties (Art. 191(2) TFEU); those who produce pollution should bear the costs this creates. 

I have long defended environmental taxation as a key tool for fair taxation and for generating the additional resources needed for Europe’s green reconstruction. The so-called ‘polluter pays principle’ incentivises more sustainable behaviour by citizens, corporations and businesses and considers the environmental cost of services and products.

For this reason, fiscal policy should be reformed and unified in order to achieve one that is environmentally focused and capable of establishing a sustainable, efficient, and competitive taxation model. How then to do this? 

Well, the announced review of the Energy Taxation Directive (ETD). is one first step. If the world has changed in a span of 13 months, how can we operate with a text from 2003, when this Directive was first approved?

The goals, commitments, and challenges that the EU faces today in energy, climate and environmental issues have significantly evolved. Not to mention the Emissions Trading System, currently inconsistent with the ETD. 

It is obvious that there is a pressing need to modernise the Directive and use it as an instrument at the service of the European Green Deal goals. In other words, the review must bring fewer taxes to green production and clear planning for phasing out fossil fuel subsidies, in line with the commitments established in the Paris Agreement and with the ‘do no harm’ principle.

Phasing out fossil fuels subsidies is no minor issue. In 2018, they represented €50bn across the EU, approximately 30 percent of that year’s total energy subsidies. In fact, the report on the State of the Energy Union 2020 pointed out the “need to step up efforts to reduce subsidies from wasteful energy consumption and to promote the energy transition”. 

Environmental taxation is a broad and cross-cutting discussion that requires working in many different areas such as industry, trade, consumption, travel, and transport, to name a few. Making sure that the negative externalities derived from these activities are duly covered is just as important as promoting good practices that produce positive externalities.

“Environmental taxation is much more than green taxes. It is an entire mindset and it is crucial if we are to achieve a successful transition to a clean, carbon-free economy by 2050”

Renewable energy and clean technologies are just an example. In any case, I believe that the European Union should lead this discussion. Likewise, the EU should be in charge of managing the resources resulting from this potential green taxation reform - because the EU is the one leading and coordinating the efforts of all Member States in achieving climate neutrality. 

This is not a fantasy. We have been battling in the European Parliament to get the EU its own sound, significant resources system. And we succeeded. The EU will have a detailed roadmap for the introduction of various additional new own resources by 2026.

We must work in the same direction with the Energy Taxation Directive. Negative externalities must be taxed while positive ones are encouraged. Redistributing and compensatory measures must be introduced together with the right price signals for the market.

The ETD must also serve to raise awareness, driving citizens towards more responsible consumption and practices. Environmental taxation is much more than green taxes. It is an entire mindset and it is crucial if we are to achieve a successful transition to a clean, carbon-free economy by 2050.

Read the most recent articles written by César Luena - European Health Union: Strengthening Europe's post-pandemic competencies