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Environmental information systems
Despite the essential role of environmental taxation for the transition to a greener economy, the share of environmental taxes in total revenues from taxes and social contributions in the European Union decreased. This share fell from 6.0% in 2010 to 4.8% in 2022. Revenues from carbon pricing are expected to increase from 2027 with the start of the new Emissions Trading System. Whether this is sufficient to halt the persistent decrease in the overall share of environmental taxes is increasingly uncertain. Revenues from energy taxation may decline as future greenhouse gas emissions reductions erode the tax base.
Figure 1. Environmental tax revenues in the EU-27: in absolute numbers and as a share of total tax revenues including social contribution (TSC), 2010-2022
Environmental taxes encourage producers and consumers to pollute less and use resources more sustainably. Making polluters pay is at the core of EU environmental policy . Both the 8th Environment Action Programme and the European Green Deal acknowledge that environmental taxation is crucial for driving the transition to a greener, more sustainable economy.
Despite this, the share of total tax revenue accounted for by environmental taxes fell from 6.0% in 2010 to 4.8% in 2022. Driven by restrictions (e.g. on transport) related to the COVID-19 pandemic, environmental tax revenue declined in 2020 and 2022 to EUR317 billion (EUR260 billion in 2010 prices). Many EU Member States reduced excise taxes on petrol and diesel to alleviate the abnormal energy prices caused by the war in Ukraine. Therefore, 2022 was an exceptional year with unprecedented state interventions. Many measures put in place by Governments are temporary and environmental taxation could rebound as these are phased out.
Energy and transport taxes combined accounted for 96% of total environmental tax revenue in 2022. Energy taxes, including carbon pricing revenues from the EU Emissions Trading System (EU ETS), accounted for 77%, transport taxes for 19%, and pollution and resource tax revenues for 4%.
Changes stemming from the Fit for 55 policy package may lead to an increase of EU ETS revenue. Sectors already covered by the EU ETS will have more ambitious greenhouse gas (GHG) emission reduction targets. From 2027 new sectors (road transport, heating of buildings, fuel use in certain industrial sectors) will be included in a new EU ETS.
This suggests that the EU could increase environmental taxes as a share of total tax revenue by 2030, however this is increasingly uncertain. Environmental taxes as a share of total taxes have persistently declined and fell sharply in 2022. It is unclear if and to what extent environmental taxes will rebound, or whether the expected revenue from the EU ETS will be sufficient to offset this drop in future.
In the long term, revenue from the EU ETS is also expected to reach a peak and then decline as more stringent GHG emission reduction requirements are introduced and drive down emissions. Progress in the EU’s transition to a climate neutral and green economy, while positive, will also erode the environmental tax base.
Figure 2. Revenue from environmental taxes as a share (%) of total tax revenue, including social security contributions, by EU Member State, 2010 and 2022
Trends in the share of total tax revenue accounted for by environmental taxes vary across the Member States. Between 2010 and 2022, this share increased in only two Member States (Bulgaria and Greece). The largest increase, from 7.7% to 13%, occurred in Greece. The share declined in the remaining 25 Member States with the largest fall between 2010 and 2022 in Ireland (4.6%) followed by the Netherlands (3.6%). The lowest share was reported for Sweden with 2.9% in 2022.