EsadeEcPol proposes green reform of fuel tax and direct compensation for low-income groups
The shift towards a low-carbon economy calls for considerable reductions in emissions in all sectors of the economy in coming years. Current policies for achieving this include energy ecotaxes, a fundamental mechanism which, according to EsadeEcPol is notably absent from the “Spain Can” plan announced by the Government to boost post-covid recovery. Spain undoubtedly has plenty of room for more eco-taxation, ranking 24th amongst the 27 EU member states in terms of the ratio of ecotax to GDP, and 21st in revenue collection. Against this backdrop, the new policy brief “Cómo utilizar la fiscalidad energético-ambiental para una transición ecológica justa en España: una propuesta enfocada a los carburantes” by EsadeEcPol (the Esade Centre for Economic Policy) features a tax reform simulation for transport in Spain, the sector responsible for the most greenhouse gases in this country and many other significant externalities. According to Marta Suárez-Varela, senior fellow at EsadeEcPol, “the significant increase in Spain’s energy ecotaxes needed for the shift towards a low-carbon economy could be socially viable if the revenue collected is used adequately to offset its possible negative impact on income distribution.”
Tax on fossil fuels
The transport sector in Spain gives particular cause for concern, with a goal for reducing greenhouse gas emissions that should be around 28% by 2030. The EsadeEcPol analysis indicates that “the current levels and, particularly, types of taxation are insufficient to achieve this goal and others within the framework of the Paris Agreement.” In addition, they are “unable to assimilate the major negative externalities related to road transport” and “have a confusing structure, with differences between fuels that contradict the environmental damage each fuel causes,” it says. The EsadeEcPol simulation using 2019 data shows that “applying the same tax rates to diesel and gasoline would reduce consumption and associated emissions by almost 2% whilst generating additional revenue of more of than €2.6bn”.
Offsetting negative impact on income distribution
Taxation of this type, “may be regressive unless designed as part of a broader redistribution reform”, warn the authors. On the one hand, “low-income households spend a higher proportion of their income on basic energy needs,” whilst “transport taxation may have a disproportionate impact on households in areas with the worst connections (suburbs, rural areas) where longer distances and fewer public transport options mean that they usually spend more on fuel.” EsadeEcPol considers that “offsetting these effects depends mainly on how the additional revenue is used”, and suggest two strategies that could be implemented alone or together.
Firstly, they suggest a rebate of part of the revenue collected by paying a set amount to the lowest-income households (5 poorest deciles) with a view to these households on the whole, on average, not being affected by the tax increase. “If 50% of the poorest households are included, earmarking just 8.9% of the additional revenue would make the tax reform progressive”, according to the simulation. “The government would still have more than 90% of the revenue available for other policies,” added the authors.
Secondly, if in addition, “all households below the poverty line receive a set amount of compensation,” probably as part of a broader tax reform according to the authors, “the rate of poverty could be reduced by 10%, using 70% of the additional revenue raised by the reform, thus ensuring it is progressive”, they say.
According to the EsadeEcPol report, the possibility of subsidising the purchase of more efficient vehicles “could be extremely regressive because the overall likelihood of buying a car is almost seven times higher in wealthy households, and the likelihood of buying a new car is 200 times higher”, the authors explain, then adding that, “if, even so, it is considered appropriate, it would be essential to restrict the subsidy to households in the five lowest-income deciles, which would also reduce the cost of the scheme to just over €50m, making it possible to increase the subsidy for this group and increase the impact of the policy.” Furthermore, in order to avoid adverse environmental impacts, “it would have to be linked to scrapping a vehicle that causes more pollution”, they said.
