Can carbon taxation be progressive? –

The increase in heating and transport costs resulting from the European Commission’s climate policy will have a limited impact on household budgets, say European analysis centres, including Poland.

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Taxes and related mechanisms that the European Commission has proposed in the package Fit for 55they have significant potential for decarbonizing the economy.

The modification of the directive on energy taxation will make it possible to link excise rates to the energy value of individual carriers and their impact on the environment.

Accordingly, economic incentives supporting environmentally neutral technologies will be introduced in the regulation.

Until now, the directive, introduced in order to reduce distortions of the internal market, had only an economic character and remained in force unchanged for almost two decades.

Within the framework of the so-called ETS 2, on the other hand, it is planned to extend the EU emissions trading scheme (ESTEmission trading system) o the key areas of construction and road transport in terms of environmental impact.

Due to changes in fuel suppliers in these sectors – such as for power plants, combined heat and power plants and steelworks – will be required to purchase allowances in accordance with the emission characteristics of the fuels used for heat homes and power vehicles.

Such a requirement will provide a strong economic incentive to reduce emissions. The possibility of an exchange of allowances on the market will allow the reduction of emissions in the first place in the companies where the best conditions exist.

However, the proposed reforms raise concerns about negative social effects. Policy makers and consumers are concerned about the sharp increase in heating and transport costs and the associated risk of energy poverty.

Although in Poland slightly fewer households than the European Union average have problems paying for energy (4.7% compared to 6.5% in 2020), they are still 27%. the energy they consume comes directly from solid fuels, including coal. This percentage is the highest in the EU, ten times higher than the EU average.

Solid fuels, being the most emissive, will become the main target of the proposed load, and their suppliers will certainly include the additional costs in their prices. In 2005-2017, Poland also recorded 76%. an increase in carbon dioxide emissions from road transport, while in the European Union this indicator has fallen by an average of 3%. ETS 2 is therefore a special challenge for our country – but also an opportunity to reduce the share of fossil fuels in buildings and transport.

The results of the latest study conducted by the consortium of European think tanks Think Sustainable Europe, of which the Warsaw think tank WiseEuropa is a member, show that this challenge can be met and the opportunity to be seized.

Thanks to the modification of the directive on energy taxation, excise duty rates on electricity will be reduced to a minimum and rates on fossil fuels will be increased, which will result in additional budgetary revenues for the ‘State. This surplus, which is significant in particular in the countries of central and eastern Europe, could be “recycled” and allocated to subsidies for households most exposed to the risk of poverty due to the rise in energy prices.

Additional revenue will also be generated by the sale of emission allowances under ETS 2. Part of this revenue will be allocated to the Social Climate Fund, which the European Commission intends to set up as a safety cushion for protect energy consumers.

The funds collected in the Fund will be used to finance grants for energy-sensitive farms. The fund will also finance investments in environmentally friendly technologies, such as the thermal modernization of buildings and the development of low- or zero-emission transport.

According to estimates by Think Sustainable Europe’s analysis team, Poland will receive almost €1.3 billion from the Social Climate Fund, with its own contribution amounting to around €650 million. Poland’s net benefit will amount to nearly €700 million, making it the largest beneficiary of the mechanism among all European Union member states.

The results of the micro-simulation that the Think Sustainable Europe team carried out using Eurostat data from around 20,000 people. households indicate that the social impact of the reforms will be limited.

The team estimated that assuming the institutional framework described above, the disposable income of the poorest half of Polish households will not decrease by more than 2% as a result of the reforms. Reforms will be incremental: richer farms will lose more, while poorer farms will lose less – or even gain.

The study did not take into account the indirect effects of the reforms, such as changes in consumer behavior or the savings that will be generated by the investments made thanks to the additional budgetary impact. In further work, the analysis team will also include these effects in its estimates, which can make the profit and loss balance even more favorable.

The results of the study show that protecting the environment and protecting vulnerable energy consumers can go hand in hand. Subsidies to households – using additional revenue from excise duties as well as funds from the Social Climate Fund – will help limit the negative effects of the changes, increasing social support for the transformation. Depending on the conditions of their provision, these benefits can also contribute to increasing individual expenditure on low-emission heat sources and means of transport.

The latter recalls the crucial need to balance objectives between the short and the long term. In the short term, subsidies will provide social protection before consumers and energy providers can adapt to regulatory changes. In the long term, investments in new technologies will enable customers and suppliers to adapt to these changes, thus reducing the role of subsidies.

WiseEuropa belongs to the network of European research centers Think sustainable Europewhich has been providing policymakers with evidence-based policy analysis since 2019. As part of the study on the social effects of the package Fit for 55 the analytical team prepared summary reporta series of partial reports devoted to selected countries, including Polandand methodological study.

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