Tax and decarbonization: Who is going to pay petrol tax?

We need to decarbonise our economy. This is a fact, and there is little to discuss about it. The political will is finally there, and it is going to happen.

What it is much less clear is how and who is going to pay for it.

The issue of “how” it is obviously a colossal technical issue: Oil consumption alone amounted, pre-pandemic, at 100 million barrels per day.

On top of this, there is Coal, and gas. This is a monumental technical problem, and one that goes far beyond the scope of a blog post.

However what I find lacking, is the clarity on the actual cost of the decarbonization, and more than anything, how these should be allocated.

In Italy alone, excise taxes on automotive fuels were, in 2019, amounting at Euro 25 billion. Exceises on Natural gas were another Euro 2.7 billion. This is a substantial part of the tax revenues of the government.

If we look at the situation in the EU28, the situation becomes even more intricated.

This chart illustrates the government revenues, by fuel source, for the year 2011. (pardon the laziness but it was the easiest accessible data).

(source: https://www.nera.com/content/dam/nera/publications/archive2/PUB_OGP_0514.pdf)

This means essentially, that, adding up the major fossil fuel components of the Energy mix, we have tax revenues for this area that exceeds Euro 470 billion.

This is an enormous amount of tax revenues that will need to be re-allocated if the consumption of fossil fuels is to fall dramatically.

At the end of the day, these tax revenues finance schools, hospitals, police, and the investment needed for the decarbonization itself.

Now let’s take, for the sake of simplicity, the automotive sector. In order to ensure revenues neutrality there are a few possible alternatives:

1. Increasing excise taxes on fuels to make up for lost revenues.
2. Taxing at a higher level electricity
3. Shift taxation to other sources, direct or indirect (such as income taxes, VAT etc.)

Every single one of these alternatives has pros and cons. And those are not insubstantial.

Increasing taxes would make the transition to electric vehicle, in theory at least, faster and more convenient. However would benefit mostly people that can afford to change their vehicles, and the increase would fall disproportionately on the working poor. And on the topic of justice, excises are deeply regressive .

Taxing electricity at a higher level would essentially make the transition slower, because of the higher cost (unless the transition is mandatory). Also, without the ability to differentiate too much on the use, it would have the same regressive characteristics.

And shifting taxation to other sources, might depress economic growth. And might not be well received by voters anyway, who tend to pay a disproportionate amount of attention to direct taxation.

so is it all bad news?

No for a few reasons. The first is that most likely, the shift to greener form of transport and energy usage will spur investment and hence economic growth, increasing the pie for everyone and hence also increasing the tax base.

Second because new technologies will increase also productivity and decrease waste, likely.

However in the short term, a certain level of pain is to be expected.

The question, which I would like to see answered, is how to distribute this pain and who should bear the brunt of it. The problem I have with all the visionary rhetoric behind decarbonization, is that certain details are always, quite conveniently ignored.

Citizens deserve more clarity on these matters. If we are to embrace the green revolution, we are entitled to know more and to get our voices heard. I hope someone in Brussels and in other capitals will stop thinking of voters as an inconvenient accessory.