Fiscal reform of the energy sector in Europe

This research paper will argue that the current fiscal treatment of energy in many EU countries is distorting competition in final energy markets and raising the cost of decarbonisation.  There are two central problems.

The first is that many countries have not introduced taxation of environmental externalities (CO2, NOx, SO2, other particulates), notably in transport and buildings.  Taxation of these externalities would introduce greater efficiency in the economy because otherwise polluters are not bearing the social costs they impose. This sort of taxation also raises the price of carbon intensive products, discouraging their use.

The second problem is the inclusion of a tax wedge within the electricity price to recover the cost of public goods, especially the financing of renewable energy in the interest of fighting global climate change.  Optimal taxation theory justifies the financing of public goods through general taxation, rather than by raising the price of a single product like electricity.  Financing public goods through general taxation would improve the efficiency of the economy and lower the price of electricity.

Together, these two reforms would introduce a more level fiscal playing field on which electricity and other energy sources could compete effectively. This competition would help to lower the price of energy, as well as the cost of decarbonizing the economy, whether through electrification of through the “greening” of fossil fuels.   The paper will analyze the problems and solutions drawing on economic theory and experience in selected countries.

By: David Robinson

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