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Carbon pricing: lessons from the National Energy and Climate Plans

EU member states are looking with increased interest to carbon pricing, as the measure gains prominence in their respective decarbonization policy toolkits. A new EEB report analyses the main takeaways from National and Energy Climate Plans (NECPs) on carbon taxation to help guide policymakers in national recovery plans.

This article has been produced for PlanUp, an open-source online platform that tracks the development of National Energy & Climate Plans

Carbon pricing is no silver bullet, but lessons from the national level show that it can drive deeper decarbonisation of all sectors of the economy if ambitiously and strategically designed.

Green (fiscal) recovery

Given the importance of economic and fiscal reforms in the EU’s €750 billion recovery package, it is expected that carbon pricing and green taxation measures will be taken into consideration or reinforced in the national toolboxes to achieve the 37% climate objective set in the Recovery and Resilience Facility.

“The EU Recovery provide a unique opportunity for governments to implement a green taxation shift internalising the ‘polluter pays’ principle, while addressing the needed distributional impacts and gaining public support”, says Barbara Mariani, Senior Policy Officer for Climate at the European Environmental Bureau and co-author of the report.

However, what we know to date about the national recovery and resilience plans (NRRPs) is that they have focused much more on investments rather than reforms, saying too little on green fiscal measures.

In order not to miss this major window of opportunity for moving towards progressive carbon pricing, the European Commission will need to negotiate further fiscal reforms with EU capitals once they have submitted their NRRPs by the end of this month.

Following the NCEPs roadmap

The National Energy and Climate Plans (NECPs), which have been already submitted by member states to the Commission, can be a valuable mirror for NRRPs, as they outline countries’ respective policy packages for climate action for the years 2021-2030.

In fact, member states are required to provide early indications in their national recovery plans on how they will ensure consistency and complementarity with the specific policies and measures set out in the National Energy and Climate Plans.

Looking at NECPs’ policy content, we can see how carbon pricing is being recognised by many European policymakers as a complementary tool for climate action. The following takeaways are drawn from the EEB’s analysis of NCEPs:

  • New carbon pricing schemes in three countries: On top of the 11 member states which already have a carbon tax in place, Germany, the Netherlands and Luxembourg have plans to put the new measure at the forefront of their decarbonisation strategies in 2021.
  • More ambition in current carbon taxes: Other countries outline ways to increase the ambition of their existing carbon taxes by raising rates, expanding the scope, or earmarking revenues for social or environmental purposes. These include Ireland, France, Portugal and Slovenia.
  • Carbon pricing is overlooked by most member states: While not all EU countries set concrete proposals on carbon taxation in their NCEPs, several member states mention that they are at least exploring the potentials of national carbon pricing and green tax reforms.
  • Some countries call for a wider carbon pricing at European level:  France’s NECP most particularly asks for carbon tax expansion and convergence to be a Union-wide strategy. Luxembourg supports carbon pricing at European level, most notably alongside Belgium and the Netherlands, for an EU-wide kerosene tax.

Towards a EU approach to carbon pricing

The overall conclusion from NECPs is that although there is still a considerable carbon pricing gap in the EU, an increasing number of member states are considering adopting taxation measures or strengthening existing ones in order to reach their climate targets.

This trend also confirms that the EU will need to set some key common criteria for effective carbon taxation rates for all member states in order to avoid ‘carbon leakage’ and competition distortions. Ideally, in the medium to long-term, the EU should aim for a Union-wide carbon pricing approach, with a high rate linked to climate targets and with an economy-wide coverage.

In the shortest term, and paving the way towards that main objective, the Commission should demand more fiscal policy reforms in the national recovery plans that could fast-track the carbon pricing measures already set out in NECPs.

EEB recently published ‘A carbon pricing blueprint for the EU’, a report commissioned by our Senior Policy Officer for Climate Barbara Mariani, that aims to contribute to the ongoing discussion on carbon pricing and green taxation to help guide policymakers