Green Fiscal Reforms can Protect Vulnerable Households and Boost COVID-19 Recovery Efforts in Europe

Green fiscal reforms can help protect vulnerable households and support pandemic recovery efforts in European countries on the road to climate neutrality by 2050, says a new World Bank report.

The latest European Union Regular Economic ReportGreen Fiscal Reformsreviews experience on carbon taxes from Europe and elsewhere with a focus on the challenges facing four EU member states, namely Bulgaria, Croatia, Poland, and Romania. The analysis highlights the importance of carbon taxes, eliminating fossil fuel subsidies, and ramping up green public investments in the EU as critical fiscal instruments in achieving the objectives of the European Green Deal. These fiscal tools will also provide financing that can help those affected by the green transition, while aiding the recovery from the pandemic.

“The report looks at how Europe can further leverage its existing green policies to support jobs and households at a time of unprecedented change,” said Gallina Vincelette, Regional Director for the European Union Countries at the World Bank. “Governments face the dual challenge of a pandemic that has had a significant bearing on national budgets and a looming climate threat that demands immediate action. On the fiscal side, this means striking a balance between taxation, investment and subsidy reform that advances an inclusive transition to a decarbonized economy.”

The report finds that well designed carbon taxes can reduce emissions and simultaneously yield economic and social benefits. For example, in the four European countries examined, revenues from carbon taxes could be devoted to lowering other taxes on labor and providing financial support to the most vulnerable households to offset the costs of transitioning to a decarbonized economy.  

To date, carbon taxes on key sectors that are not covered under the EU’s Emissions Trading System (ETS) in Bulgaria, Croatia, Poland, and Romania remain low. Current carbon pricing levels will need to increase gradually to reduce emissions and for societies to reap the benefits from lower air pollution and potentially reduced traffic congestion. Vincelette added: “Getting the price of carbon right is critical to achieve net zero emissions by 2050. Reforms to carbon taxes and phaseout of fossil fuel subsidies can strengthen price incentives for private sustainable investment, while green public policies and investment can help overcome market failures holding back innovation, green infrastructure and more efficient use of energy and materials.”

Stimulating public investment in green technologies and services can also have a large fiscal multiplier effect. The benefits to national output from green investments have been found to be higher than investments in fossil fuel assets. Not only would this be timely support for clean technologies but would also help drive the economic recovery from the COVID-19 pandemic. The EU’s Recovery and Resilience Facility (RRF) provides a unique opportunity for EU member states to invest in a green economy and support the European Green Deal via its pandemic recovery efforts.

On fossil fuel subsidies, the report highlights the need to increase transparency as support to carbon-intensive investments are often provided through channels other than government budgets including state-owned enterprises (SOEs). Moreover, there is the long-standing issue of ‘indirect subsidies’ that are difficult to fully quantify such as support for road infrastructure that enables diesel vehicles and railways that support trains powered by coal-fired electricity. To tackle this, the report states the urgent need for comprehensive estimation of subsidies for fossil fuels and their reduction in line with EU and country climate targets.