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Despite the essential role of environmental taxation for the transition to a greener economy, the share of environmental taxes in total revenues from taxes and social contributions in the European Union decreased. This share has fallen from 6.3% in 2010 to 5.1% in 2023, the lowest level since 2010, setting the indicator outlook towards 2030 to be likely off track. The reasons for a decline vary, including: a shrinking tax base linked to electrification, structural changes in the economy, absence of tax indexations, and resistance to environmental taxes.
Figure 1. Environmental tax revenues in the EU-27: in absolute numbers and as a share of total tax revenues including social contribution (TSC), 2010-2023
Environmental taxes encourage producers and consumers to pollute less and use resources more sustainably. Making polluters pay is at the core of EU environmental policy. Both the 8th Environment Action Programme and the European Green Deal acknowledge that environmental taxation is crucial for driving the transition to a greener, more sustainable economy.
Many EU Member States reduced excise taxes on petrol and diesel to alleviate the abnormal energy prices caused by the war in Ukraine. Therefore, 2022 was an exceptional year with unprecedented state interventions.
Energy and transport taxes combined accounted for 95% of total environmental tax revenue in 2023. Energy taxes, including carbon pricing revenues from the EU Emissions Trading System (EU ETS), accounted for 76% of total environmental tax revenue, transport taxes for 19%, and pollution and resource tax revenues for 5%.
Environmental tax revenues in Europe have fallen as the shift to renewables, electrification, energy efficiency gains and structural change have reduced the tax base. In some countries, decades without indexation and temporary energy price relief since 2021 have added to the decline.
The proposed revision of the Energy Taxation Directive aims to promote electrification, remove fossil fuel subsidies and align taxes with decarbonisation goals. The Clean Industrial Deal stresses that tax policies are vital for competitiveness, resilience and sustainability. Revenues from carbon pricing are expected to increase from 2027 with the start of the new Emissions Trading System (ETS2), but it is uncertain whether this is sufficient to reverse the persistent decline in environmental taxes.
This suggests that the EU could increase environmental taxes as a share of total tax revenue by 2030, however this is increasingly uncertain. Environmental taxes as a share of total taxes have persistently declined and fell sharply in 2022 and 2023. It is unclear if and to what extent environmental taxes will rebound, or whether the expected revenue from the EU ETS will be sufficient to offset this drop in future.
In the long term, revenue from the EU ETS is also expected to reach a peak and then decline as more stringent GHG emission reduction requirements are introduced and drive down emissions. Progress in the EU’s transition to a climate neutral and green economy, while positive, will also erode the environmental tax base.
Figure 2. Revenue from environmental taxes as a share (%) of total tax revenue, including social security contributions, by EU Member State, 2010 and 2023
Trends in the share of total tax revenue accounted for by environmental taxes vary across the EU 27 Member States. Between 2010 and 2023, this share increased in only two Member States (Bulgaria and Greece). The largest increase, from 7.7% to 10.6%, occurred in Greece. The share declined in the remaining 25 Member States with the largest fall between 2010 and 2023 in Ireland (from 8.6% to 4.4%) followed by the Netherlands (from 9.7% to 7.3%). The lowest share was reported for Luxembourg at 3.1% in 2023.