The Impact of Climate and Energy Policies on the Public Budget of EU Member States

In the current context, where public budgets are overstretched due to the economic crisis, there is a pressing need to understand the fiscal implications of climate policies. Policies intended to achieve decarbonization will impact both sides of a country’s budget via changes in the tax levels and composition of taxes on the one hand, as well as transfer payments and direct investments on the other. Back-of-the-envelope calculations – comparing net public revenues in 2020 for a Baseline and an Enhanced Policy scenario – show that the additional revenues from carbon pricing and the reduction in revenues from excise taxes on fossil fuels clearly dominate other direct and indirect effects of policies on public budgets such as the additional expenditures dedicated to RD&D targeting low-carbon technologies. The aggregated net budget impact of all direct and indirect effects of new climate policies implemented in the Enhanced Policy Scenario on public budgets in 2020 for the EU-27 as a whole – given our simplyfying assumptions – amounts to additional net public revenues of about €12.6bn (0.09% in terms of the EU-27 GDP) under medium-level abatement costs. This makes a non-negligible impact which is nevertheless much lower than the impact on public accounts from changes in main macroeconomic variables over time. Differences among Member States mainly depend on the additional revenues they will obtain from carbon pricing, which are driven by three main factors: the carbon intensity of the economy, which is positively correlated with the absolute value of the net budget impact of new policies; the share of non-ETS GHG emissions, which is positively correlated with the net budget impact; and the reduction in GHG emissions resulting from new policies, which is negatively correlated with this impact. Countries most significantly affected, both positively and negatively, are among the “new” Member States in the EU-27. In contrast, the impact of new climate policies on large EU-15 economies would be generally positive and typically in line with average EU values. Therefore, authorities from the EU-15 may consider the option of sharing the economic burden of the transition to a low-carbon economy among EU countries, taking into account their economic strength.