Green redistribution policies will play a key role in Portugal’s EU mandate, from taxing polluters to non-harmful investments. The Portuguese Presidency must pave the way for an ambitious and timely green fiscal debate that assists the EU in tackling both the climate and Covid-19 crises.

EEB will analyse the Ten Green Tests delivered to the Portuguese Presidency of the EU in a series of articles. In this one, we take a closer look at the role of EU fiscal policies in aiding a green transition.

Since the EU institutions reached an agreement on what will be the biggest green investment plan ever seen, the debate on fiscal reforms has become a central point of debate. The EU will restart its economy under the following green stimulus: a 750 billion EUR recovery package with 37% of the Recovery and Resilience Facility (RRF) allocated to the European Green Deal and 30% of the Multiannual Financial Framework, an envelope of 1.100 billion EUR, dedicated to climate.

After reaching this historic agreement in 2020 under Germany’s EU Presidency, it is now Portugal’s turn to deliver and lead by example in the targeting and implementation of such funds, as well as the choice of accompanying policy reforms. To catalyse the green transformation, two premises must prevail on the Portuguese priority list: the ‘polluter pays’ must be addressed through tax reforms and EU investments must always follow the rule of being “not harmful”.

The Portuguese Presidency must prepare the ground for a joint ambitious engagement on fiscal policies, from Member States to EU institutions, to deliver transformative investment and policy reforms for ‘building back better’.

Towards carbon-neutral market ‘invisible hand’

Despite existing legislation covering emissions from most EU economic activities, there are some sectors, notably transport and buildings, that are slow in decarbonising and need attention.

Portugal will hold a privileged position to influence ongoing fiscal initiatives in order to raise climate ambitions that can affect these sectors, at home but also globally.

The reforms of the Energy Taxation Directive (ETD), the Emissions Trading System (EU ETS) and the carbon border adjustment mechanisms are the greatest opportunities ahead for placing Europe’s economy on the rails of the European Green Deal (EGD). 

The Portuguese Presidency must encourage a progressive debate on taxation reforms to create the basis for a good input to and reception of carbon pricing initiatives, said Barbara Mariani, Senior Policy Officer for Climate at the European Environmental Bureau (EEB).

“We need a Paris Agreement compatible CO2 price under these fiscal initiatives and policy coherence to ensure that the polluter pays principle is fully internalized in all economic activities. It’s time to take a combined approach to improve economic signals towards a climate-neutral economy”,

Mariani pointed out.

The revision of the Energy Taxation Directive, specifically addressing these two decarbonisation laggards (fuels in transport and heating), will be key to internalise the ‘polluter pays’ principle and the carbon footprint in EU energy taxation regimes. A “carbon offsetting mechanism” is also being discussed to address emissions in agriculture and forestry.

The Portuguese presidency will not only have to set the scene for for the negotiations on the ETD in June, ensuring prior discussion on green standards, it will have also to lead by example on carbon pricing. As agreed in the December Council Conclusions on the Eurovignette Directive, which regulates road pricing, Portugal will be able to apply transport carbon pricing to complement charging on air pollution and noise.

‘Does no harm’ funds watchdog

On Tuesday (9 February), MEPs voted to pass the Recovery and Resilience Facility (RRF), unlocking an unprecedented 265 billion euros in funding available for the green transition in the form of grants and loans to EU countries. This 37% of the total fund, framed in the National Recovery and Resilient Plans (NRRP), for spending on climate-friendly measures is a historic step for Europe but it will require careful green scrutiny from EU policy-makers and civil society.

According to the Portuguese Presidency, the Commission is already in “intensive dialogue” with member states about their plans and has received drafts from 19 countries. In these first NRRP proposals there will be many paths but probably not enough renewables.

Portugal will be able to show how NRRPs can be implemented with the European Green Deal at its core and dodging support for fossil fuel-based projects. It must also demonstrate that the NRRPs drafting and adoption process reaches its highest potential when it includes an active and structured dialogue with stakeholders and civil society actors.

“The NRRPs are the great boost national economies need to achieve carbon neutrality”, stressed Patrick ten Brink, Director of EU Policy at the European Environmental Bureau (EEB).

To catalyse the green transition towards a zero-pollution, toxic-free, circular and carbon-neutral economy, the NRRPs compasses must be crystal-clear: end harmful subsidies and invest in transformative policy reform. 

No fund should be Paris-incompatible, this includes subsidies to fossil fuels, funding for intensive agriculture that compromises biodiversity and climate ambition, water and air quality, and fishing funds that undermine fish stocks and marine ecosystem health. On the other side, all ‘does no harm’ investment must pivot around EGD objectives and be driven to renewable energy, energy efficiency, smart mobility, industry decarbonisation, reducing emissions in agriculture and preserving biodiversity.

On this last note, Portugal has a role to play in influencing the EU budget to ensure strict criteria for biodiversity funding and the effective use of the 7.5% and 10% that are allocated to biodiversity and large-scale restoration from 2024 and 2026 respectively.

Read more in our Memorandum to the Portuguese Presidency.

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