4.10 Green taxation and other economic instruments

This briefing examines the application of green taxation and other economic instruments, which are set out in EU policies; it assesses their impact where the data allow. Economic instruments — such as carbon pricing — have been deployed under energy and climate policies to achieve policy objectives across various environmental domains. Carbon pricing policies are also addressed in the related briefing on climate governance.

Key policies

Economic instruments applied under the circular economy action plan include extended producer responsibility (EPR) schemes and deposit-refund systems. Other instruments are applied under the EU rules on packaging and packaging waste and the Single-Use Plastics Directive. To deliver on the European Climate Law, the EU Emissions Trading System (EU ETS) enacts the polluter pays principle.

Past trends (10-15 years)

Trends/developments show a mixed picture

Economic instruments have advanced the EU’s environmental and climate objectives. The EU ETS cut GHG emissions from power and industry by 47% between 2005 and 2023. EPR, under the Waste Framework Directive, has been linked to increased recycling. However, environmental tax revenues declined from 7% of total tax revenues in 2011 to 5% in 2022, driven by lower energy taxes.

Energy subsidies have shown mixed trends. Total energy subsidies rose from EUR 177 billion in 2015 to EUR 390 billion in 2022. Financial support for energy-efficiency measures reached EUR 32 billion in 2022. However, after declining between 2015 and 2021, fossil fuel subsidies surged to EUR 123 billion in 2022 due to the energy crisis. Renewable energy subsidies fell to EUR 86 billion in 2021 and edged up to EUR 87 billion in 2022.

Outlook (10-15 years)

Trends/developments expected to show a mixed picture

Several new economic instruments will shape the upcoming policy cycle. The 2023 revision of the EU ETS tightens the emissions cap, aiming to achieve a 62% reduction in emissions by 2030. It also introduces the ETS2 in 2027, covering buildings, road transport and specific industrial fuels. Revenues from both schemes will fund climate and energy initiatives, including for heating and transport,. Green taxes resulting from the ETS2 will also fund the Social Climate Fund. The Carbon Border Adjustment Mechanism will align carbon prices for imported and EU-produced goods, promoting cleaner industrial production globally.

In the energy sector, new electricity market rules, adopted in May 2024 and effective from July 2024, include power purchase agreements (PPAs) for stable long-term electricity pricing and two-way ‘contracts for difference’ to support investments in electricity generation. The upcoming Energy Taxation Directive revision aims to align taxation with climate objectives. 

Environmental tax revenues from energy taxes and carbon pricing policies are expected to decrease as energy consumption shifts away from fossil fuels. However, progress on phasing out fossil fuel subsidies has stalled, with most Member States lacking concrete plans for eliminating them.

The 2023 proposal to revise the Waste Framework Directive introduces mandatory harmonised EPR schemes for textiles in all EU Member States. EPR fees will be based on ecodesign standards (i.e. eco-modulation).

Prospects of meeting policy targets 2030/2050

2030: No specific policy target

2050: No specific policy target

Robustness

Past data on environmental tax revenues are well-established and robust, while data on fossil fuel subsidies are less reliable due to the fact that there is no common reporting standard. Outlook information and data on future revenue streams and plans for the phasing out fossil fuel subsidies are not available. The outlook assessment therefore relies on expert judgement.

Charts/maps

Figure 1. Environmental tax revenue in the EU-27, 2010-2022

Figure 2. Fossil fuel subsidies in the EU-27, 2015-2023