A European Green Tax Deal during the Pandemic: A New Start?

A year ago, Ursula von der Leyen, then the newly elected President of the European Commission, launched a “European Green Deal”.  A year later, on 16 September 2020, von der Leyen confirmed her plan to make Europe the “first climate-neutral continent by 2050” in her State of the Union address. You could be forgiven for thinking that nothing had changed over the last year, as European countries struggle with successive waves of the covid-19 pandemic. But in fact the pandemic has brought about a material shift in the political and economic thinking on the European Green Deal and on the environmental tax proposals that are part of it. This shift in thinking is not limited to the EU. Closer to home, Boris Johnson recently announced his intention to use wind farms to “power every home in the UK by 2030”. Moreover, the UK is considering the introduction of a carbon emissions tax.

Proposals to introduce environmental taxes at the EU level have been discussed over a long period before the pandemic. In fact, the EU has been considering environmental tax measures for almost 30 years. The first proposal in favour of a carbon tax was issued by the European Commission in 1992. More recently, the Commission has proposed the introduction of border carbon adjustments and a broad revision of the energy taxation directive. This plan has not changed since the pandemic. No new environmental tax proposals have been introduced as a response to the COVID-19 crisis in the EU. Yet, the absence of any new tax proposals should not be interpreted as reflecting the absence of any renewed interest in changing the current regime. Rather, there are signs that the pandemic is creating a catalyst to the adoption of environmental tax measures that have been on the negotiation table for too long. This is because the pandemic has provided the Commission with a new context, and new arguments, to support the early adoption of environmental tax proposals.

First, the pandemic has reinforced the view that environmental costs should be internalized and that polluters should pay for the pollution they cause. That might seem paradoxical. Businesses have been significantly hit by the crisis, which might suggest that it is not the right time to introduce new environmental tax measures that would add to their cost base.  However, the contrary might be true. In the context of the pandemic, governments have played a key role in supporting businesses by providing them with financial support. This financial support might be seen as a bargaining chip in the push for the adoption of stricter environmental standards and environmental tax measures. In that context, it is not surprising that the European Parliament has emphasised that the European response to the pandemic – specifically, its recovery and reconstruction package - should be aligned with the “EU’s objective of climate neutrality” and should help support the “ecological transition”. The theme is echoed more widely. For example, the German presidency of the Council of the EU has underlined its priority to “ensure that the Green Deal helps overcome the consequences of the COVID-19 pandemic”. Moreover, both the IMF Fiscal Affairs Department and the OECD discussed the key role that environmental tax measures could play as a response to the COVID-19 crisis.

Second, the pandemic has reinforced the view that the EU needs “truly European taxes”. This view is not new: many commentators believe that a monetary union cannot function properly without a fiscal union that includes genuine European taxes. Environmental taxes could be a good candidate to establish such “truly European taxes”. This is for two main reasons. First, from a substantial viewpoint, it makes good sense to act at the EU level rather than at the Member States level when it comes to environmental problems. Such problems (like climate change or marine pollution) are by their nature truly global. Second, from an institutional viewpoint, environmental taxes might be a form of taxation that is an easier “sell” at the European level, making them more likely to be adopted in practice. In 2019, the European Commission published a recommendation in which it suggested that less restrictive voting requirements could apply to the adoption of certain types of taxes, including specifically energy taxes. Consequently, it is not that surprising that the European Institutions, including the European Commission, the European Parliament and the European Council are all considering border carbon adjustments among the potential taxes that could serve to establish a new EU own tax base.

Of course, it is impossible to predict with certainty whether the EU will be successful in making its Green Deal a reality, aligning its tax policy to environmental objectives and introducing border carbon adjustment measures. As is well known, the EU has failed – on several occasions - to reform its energy tax policy in the past. Yet the Commission might be more successful this time. Maybe counterintuitively, the pandemic might serve as an opportunity - rather than as a new obstacle - to the adoption of environmental tax measures at the EU level. While the world is looking for a vaccine to fight against COVID, a harmonized carbon tax could be part of the remedy for both the economic and climate crisis.

Recent relevant research from the Centre for Business Taxation:

Roland Ismer, Karsten Neuhoff and Alice Pirlot, Border carbon adjustments and alternative measures for the EU ETS: an evaluation (2020) DIW Berlin Discussion Paper No. 1855

Alice Pirlot, Exploring the Impact of EU Law on Energy and Environmental Taxation, in: C. HJI Panayi, W. Haslehner, E. Traversa (Eds.), Research Handbook in European Union Taxation Law (2020) Cheltenham, UK

Richard Collier, Alice Pirlot, John Vella, Tax Policy and the COVID-19 Crisis (2020) 48 Intertax (Issue 8/9).