Deutsche Bank: Climate taxes to sort out public finances – The debate in the EU
New EU Monitor on climate taxes
Practically all member states in the European Union are grappling with massive budgetary black holes caused by economic stimulus programmes, bailout packages and crisis-driven revenue shortfalls. The prospect of this and next year‘s budget deficits averaging around 7% of GDP across the EU is ramping up the pressure to consolidate.
At the same time progressive climate change calls for urgent action. It is estimated that even now the 2°C warming target can be met only with the utmost effort. Worldwide the impact of global warming is becoming ever more starkly apparent. The pressure to act is mounting.
Climate taxes carry a heavy burden of expectation. They are supposed to have both a financing and a steering effect. However, there is a trade-off between the two, because if climate taxes work revenues will fall.
Climate taxes have only limited capacity to consolidate public budgets. On average for the EU, environmental taxes currently account for only a modest 2.5% share of GDP. Additional climate tax revenues differ vastly from one country to another.
EU-wide harmonisation of climate taxes is very difficult to achieve politically. The EU Commission‘s proposal for a directive on the harmonisation of climate taxes is meeting with considerable resistance. The huge diversity of national solutions currently in force represents a major stumbling block to standardisation.
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Deutsche Bank Research