Tax policy as catalyst for sustainable economic recovery after COVID-19: a first glimpse

Alignment of economic recovery measures and climate objectives

Governments worldwide are preparing the launch of economic recovery measures to mitigate the disruptive effects of COVID-19. Thought leaders from all political spectrums are calling for these measures to be aligned with climate objectives (see e.g. https://www.smithschool.ox.ac.uk/research/covid-19/; https://foes.de/publikationen/2020/200330_FOES_Economic_support_measures_corona_crisis.pdf). They see these measures as an opportunity to speed up the transition into a green, sustainable economy. So far, it seems that governments, especially in the EU, are genuinely willing to deliver on this expectation. As this may put businesses already distressed by COVID-19 under further pressure, especially in traditional industries that may have not been following a green agenda yet, it remains to be seen how this will be balanced politically. 

How tax policy can sponsor recovery into a more sustainable economy

New taxes to promote decarbonisation

A sustainable economic reboot calls for, among other things, a tax framework that facilitates climate-oriented decisions. For obvious reasons, energy taxes in a broad sense have been identified as major driver for decarbonization well before the COVID-19 crisis.

As part of the Green Deal, the EU has announced its plan for a big energy tax reform, featuring a revision of the energy taxation directive (adopted 17 years ago). The reform is aimed at aligning taxation of energy products and electricity with EU energy and climate policies with a view to contributing to climate neutrality by 2050. The EU Green Deal further envisages the introduction of a carbon border adjustment mechanism to ensure that the price of imports reflects more accurately their own carbon content. In addition, the EU Green Deal also advocates for the introduction of some type of aviation taxes.

Even in the face of the COVID-19 crisis, the EU has reconfirmed its commitment to the climate actions set out in the Green Deal. Together with other measures, the Green Deal is considered as one of the pillars on which the European Council’s and European Commission’s recovery strategy, the so-called Roadmap for Recovery, is based. 

Tax reliefs for sustainable spending

Increased public spending on infrastructure may be one of the measures for economic recovery. The benefits are many-fold, as it, hopefully, leads to respective job creation while at the same time a focus on renewable energy infrastructure could foster the sustainable economic recovery. However, a resilient economic recovery also requires private spending. Tax policy can play a major role in stimulating private spending, eg by introducing tax reliefs as a policy measure. If used sensibly, on climate neutral goods and services such as electric cars and solar infrastructure, such policy measures may not only contribute to the objective of economic recovery but also achieve a more sustainable economic reboot.

In the EU, for example, self-generated electricity from renewable sources that remains within the premises of a consumer will have to be relieved from electricity taxes by June 2021. The legal basis for this relief is the EU directive on the promotion of the use of energy from renewable sources (Directive (EU) 2018/2001). It foresees a relief from any charges or fees for self-generated electricity from renewable sources under certain conditions. Some countries, such as Austria, have already adopted a respective tax exemption. It promotes the self-generation of electricity from renewable sources over the purchase of electricity from public grids. Likewise, a boost in demand for renewable energy infrastructure such as solar panels is expected.

A lot is in motion, outcome yet to be seen

Although the COVID-19 crisis may be a catalyst for a more sustainable economy, i.a. by introducing specific tax policy measures or redirecting fossil fuel subsidies, it may also delay the implementation of such measures. At the same time, with government spending at a record high, it is uncertain whether countries can afford revenue cuts in times of economic recession or a shift towards taxing more heavily industry sectors that are already badly affected by the COVID-19 crisis – will governments be willing to insist on the introduction of new 'green taxes' on industries given that they are now investing billions into their bail-out? It will be interesting to see how this develops.