Greening the federal tax system
21068
From 2021 to 2022
TML analysed possible routes for a more environmentally friendly reform of the federal tax system, with a focus on carbon taxation and greening in key sectors to reduce carbon emissions. The study included a review of the Energy Taxation Directive, the introduction of a carbon tax, and other fiscal measures, with TML using the EDIP model for macroeconomic analysis and the Delphi method for additional measures.
The aim of this study was to analyse possible avenues for a more environmentally friendly reform of the federal tax system. For this purpose, we distinguished two dimensions: (i) the taxation of energy products through carbon tax and increased excise duties as part of a climate tax shift and (ii) measures for greening the federal tax system in certain key sectors. These were selected based on their potential to reduce carbon emissions in non-ETS sectors or other environmental pressures.
Our research was conducted based on the following three types of analysis:
- The first part of the reform scenario includes the revision of the Energy Taxation Directive (ETD). The revised ETD aims to reform excise taxes on energy products from January 2023 and base these taxes on the environmental performance of energy production and their (calorific) energy content. It also aims to eliminate most fossil fuel subsidies.
- The second element of our reform scenario is a tax on the CO2 content of fossil fuels in sectors not covered by the ETS, with revenues being recycled. This is also known as a budget-neutral climate tax shift. We assessed the environmental and socio-economic impacts of introducing a carbon tax on transport and heating fuels of €20/t CO2 in the short term (2023) and €70/t CO2 in the medium term (2030), respectively. In the macroeconomic analysis, we also looked at the impact of a 100 euro/tonne CO2 carbon tax. The application of revised minimum rates and carbon prices in the transport and construction sectors will lead to emission reductions between 3% and 12.5%. The results have been benchmarked against other studies and are comparable to the estimated impact of a similar carbon tax in other countries. Our results are also consistent with recent IMF estimates.
- As a third element, we studied other fiscal measures. We proposed a list of specific priority measures that could be taken in five key areas. These measures, in combination with the proposed energy tax reform, can be part of a green tax policy mix that contributes to better environmental protection.
The carbon tax should be part of a broader policy mix. Our results showed that a price on transport and heating fuels of €70/t CO2 in 2030 alone is not sufficient to achieve the required emission reductions. This finding is in line with the literature. The climate tax shift will have to be complemented by existing or new measures to reduce GHG emissions, at federal, regional, and European levels.
For the macroeconomic analysis, TML used the European model for assessing the effects of economic policies on income distribution and inequality (EDIP), a Computable General Equilibrium (CGE) model. We used EDIP to calculate the effect of different levels of carbon taxes on total CO2 emissions from transport and buildings by 2030. The model also allowed us to estimate total tax revenues and assess the impact of different tax redistribution alternatives. To study the other tax measures, we used the Delphi method, supported by a synthesis of the literature and an evaluation of country case studies.
TML led the project, in collaboration with HIVA (KU Leuven) and Université Saint-Louis Bruxelles (USL).
