Green Fiscal Reform for a Sustainable Future

Green Fiscal Reform for a Sustainable Future

Reform, Innovation and Renewable Energy

Critical Issues in Environmental Taxation series

Edited by Natalie P. Stoianoff, Larry Kreiser, Bill Butcher, Janet E. Milne and Hope Ashiabor

This timely book focuses on achieving a sustainable future through the reform of green fiscal policy. Green fiscal policies help not only provide the needed financing but may also serve the Sustainable Development Goals adopted by the United Nations in 2015. In this volume environmental tax experts review the development of fiscal carbon policy, consider the impact of green taxation on trade and competition, analyse the lessons learned from national experiences with fuel and energy pricing, and evaluate a variety of green economic instruments.

Chapter 2: Tax credit hypothesis to coordinate the EU ETS and EU energy tax systems

Lorenzo del Federico and Silvia Giorgi

Subjects: environment, environmental economics, environmental law, environmental politics and policy, management natural resources, law - academic, environmental law, tax law and fiscal policy, politics and public policy, environmental politics and policy


The chapter first aims to analyse the legal nature of the EU Emissions Trading System (ETS) and, in particular, the hypothesis that considers taxes as obligations to acquire allowances for a valuable consideration. It is worth specifyingthat an intangible ‘allowance’ is one thing, but quite another is the obligation to buy a certain number of allowances corresponding to the polluting emissions. The ETS seems to be a hybrid and multipurpose instrument, with a fiscal function that is neither exclusive, nor prevalent. There is, in fact, a combination of priority environmental aims and energy efficiency promotion aims.Against this background, the ETS should be coordinated with CO2 taxation in order to avoid overlaps between the ETS on the one hand, and taxation serving the same purpose on the other. Indeed, although the ETS allocation system has changed over the course of time, moving from the original criterion of free allocationto the auctioning allocation, derogations from the general rule of auction are still provided. It is clear that only allowances allocated through auction are in line with environmental principles. The cap represents the acceptable risk: the amount of emissions included in the cap follows the polluter-pays-principle as economic compensation for the emitted tonnes of CO2. Beyond such a limit, further allowances cannot be emitted and, as a consequence, no further emissionsare tolerable, according to the prevention principle. The cap itself is the measure identified ex ante to reduce the risk of environmental damage. From this assumption, the allowances allocated for free seem, at first sight, to run contrary to environmental principles and aims. Their ratio is inspired by principles outside environmental ones and, first of all, by the aim to prevent a loss of competitiveness in certain production sectors and a possible diminution of economic development and employment. Therefore the measures to coordinate ETS with energy taxation –such as exemptions or tax credits –must be tested in order to identify the most environment-oriented solution.In the last part of the study in fact, the proposal of a tax credit as a method of coordination will be analysed.

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