Can the green transition be fair?
Climate policies are too often believed to increase the gap between rich and poor households or reduce the affordability of energy services.
However, with the right policy design, greenhouse gas emission targets can lead to both a cleaner, more climate-friendly environment and a fairer society.
If designed in the right way
To increase the social benefits of climate policies and garner support from policy makers and society, revenues from carbon penalties can be used to offset potential regressive effects (i.e. that harm low-income groups more) by compensating low and middle-income households that may otherwise bear the negative impacts.
In Spain, environmental taxes such as fuel taxation have often been rejected by the public and policy-makers as regressive, but with the right design and implementation they can become a fairer, more acceptable and politically viable measure. Here is how:
The scenario
The pollution problem
Spain has committed to cut its greenhouse gas (GHG) emissions by 34% in 2030. To achieve such a target, the country’s political decision-makers have to utilize energy and environmental taxes to accelerate decarbonization. Such policies are needed to cut emissions, especially in sectors where emissions are high and difficult to reduce, as is the case of road transport.
Decarbonization in road transport is key as it is responsible for around 27% of the country's emissions. To attain this goal, political decision-makers still have plenty of room to raise taxes on fuel, which are very low compared to neighboring countries. Moreover, in Spain, as in most countries, diesel is taxed less than gasoline, even though there is no justification for this difference in terms of environmental externalities.
This anomaly has been highlighted by several international organizations, which have recommended that governments increase taxation on fuel. However, to date, this technical consensus has not been translated into specific and effective reforms. The arguments against the reform stressed its potential adverse effects on the economy and society, particularly in terms of income distribution, accusing it of being a regressive policy.
A greener and fairer economy is possible
Mikel González-Eguino
Ikerbasque Professor, BC3
focus
International and expert recommendations
iea (2015)
“Spain should increase taxes on fuels”
Energy Policies of IEA Countries: Spain 2015 Review, OECD/IEA.
The process
In order to understand whether the concern related to the negative social impacts of fuel taxes is valid, we studied the distributional impacts of raising the excise tax on diesel to the same level as that on petrol for final consumers in Spain, and also explored different compensation mechanisms to see if the negative impacts can be alleviated.
To do so, we combined quantitative and qualitative methods in several stages (4 different steps) to jointly design and evaluate possible tax reforms to eliminate the favorable tax treatment of diesel compared to petrol. As a first step, we analyzed the distributional consequences of a tax increase on diesel. In the second stage, we discussed our results with stakeholders. In the third stage, we co-designed compensation schemes with stakeholders. Finally, in the fourth stage, we analyzed policy packages with the diesel tax increase and the co-designed compensation schemes.
The BC3 process
Mikel González-Eguino
Ikerbasque Research Professor, BC3
ANALYSIS
stage 1
Analysis of the effects of raising the tax on diesel to the same level as that on gasoline and initial expoloration of offsets
DISCUSSION
stage 2
Discussion of the results of the initial modeling with stakeholders through focus groups
DESIGN
stage 3
Joint design of policy, taking into account the perceptions of the various stakeholders
ASSESSMENT
stage 4
Assessment of new scenarios based on the ideas obtained from stakeholders
A
Is the environmental taxation always regressive?
EU Green Deal
A common vision for a climate neutral continent in 2050
The EU Green Deal aims to transform the EU into a modern, resource-efficient and competitive economy, ensuring no net emissions of greenhouse gasses by 2050. In this context, green taxation is key for speeding up the transition to a sustainable economy and for meeting the climate targets set in the Paris Agreement. Environmental taxes enable the social costs (externalities) arising from the production and use of goods and services to be internalized. In the short term, they encourage economic actors to reduce their environmental footprint in an efficient and effective fashion. In the medium and long term, they also generate significant benefits by fostering innovation, orienting investment decisions towards cleaner technologies, and providing a source of public revenue.
However, policy-makers are reluctant to implement environmental tax reforms, citing their possible adverse effects on the economy and society, and accusing it of being a regressive policy. Therefore, our first question is: are all environmental taxes regressive? And to be more specific, are taxes on diesel in Spain regressive?
The EU green deal
Eva Alonso Epelde
Junior Researcher, BC3
focus
Social disorders in Europe
Policy-makers' concern about environmental taxation has increased in recent years, especially in the wake of social unrest after the introduction of fuel taxes in countries in Europe and around the world, stemming from the belief that they affect lower income groups and the working class more.
The riots in France during the yellow vest movement are the perfect example of public rejection of fuel taxes if they are introduced without taking into account their social implications. Additionally, the rejection of the Swiss climate law at the ballot box, or the protests in Chile and Ecuador over higher energy taxes demonstrate the importance of introducing fair tax reforms.
Belief vs Reality
Despite fairness concerns, the scientific evidence suggests that the regressive nature of taxes on fuel depends on consumer spending patterns, which vary widely from country to country. In Spain, taxes on fuel for private transport has been found to be slightly regressive in the literature
Their impact varies widely among households that have similar economic circumstances but differ in their social and demographic characteristics, such as location, type of family, or access to public transport. Based on our previous research, an increase in the diesel tax in Spain can be expected to hit rural households in sparsely populated areas hardest.
D
Stakeholder engagement: barriers and beliefs
Gathering expert opinion
If fuel taxation in Spain is only slightly regressive and affects middle-income groups more than low-income groups, why is it so difficult to increase diesel taxation in Spain? In the second stage of this study, we put this question to the relevant stakeholders in Spain, showing also our previous policy analysis.
Dialogue with social and economic stakeholders is crucial because it helps to increase the political relevance of the study. It allows for a better understanding of what the real-world barriers are and how to overcome them.
However, policy-makers are reluctant to implement environmental tax reforms, underlining their possible adverse effects on the economy and society, especially in terms of income distribution, and accusing it of being a regressive policy. Therefore, our first question is: are all environmental taxes regressive? And to be more specific, are taxes on diesel in Spain regressive?
A multidisciplinary approach
María José Sanz
Scientific Director, BC3
focus
Focus group activity
Twenty-two people took part, representing various institutions including consumers, trade unions, businesses, NGOs and small municipalities. The institutions taking part were selected in an effort to assure the broadest possible heterogeneity and diversity of opinions.
Stakeholder Opinion
Stakeholders saw the convergence of the duty payable on diesel with that on gasoline as a reasonable and necessary measure. Some also suggest that policies to transform the current transportation system were needed, over and above specific tax reforms such as that analyzed here.
In regard to the distributional impact of the reform, all stakeholders expressed concern that the effects of the policy might be regressive, albeit only slightly, and that this could be used in policy debates as an argument against its implementation. Some believed that it was unfair that the reform had hardly any impact on the wealthy but hit the middle classes much harder. Moreover, its impact on households in rural areas with lower population densities was also a concern for all groups.
The focus groups also discussed some procedural aspects of the design and application of the reform. They highlighted the need for educational campaigns to help the public understand the purpose of and need for the measure, and the importance of fostering active public participation in the design of policies of this type to avoid controversy and rejection.
Your opinion
Favourable
No consensus
Indifferent / not discussed
Unfavourable
municipalities
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The relevance of the green taxes
In the focus groups, stakeholders from different actors in society were clear about the need to introduce green taxation. Stakeholders saw energy/environmental taxation and the convergence of the duty payable on diesel with that on gasoline as reasonable and necessary measures to propel the energy transition, provided that they bring about fair outcomes. Although the discussions centered on increasing the tax on diesel, some participants highlighted the need for more far-reaching policies on mobility and taxation.
D
Co-designing compensation schemes with stakeholders
Offsetting the negative impacts and losers
Although diesel taxation is not very regressive in Spain, there are some undesirable impacts, such as higher losses in rural households. However, the detrimental effects of energy/environmental taxes can be reversed through compensatory policies financed through the additional revenue generated, which would make such taxes more acceptable in society.
In the policy explored, where the excise duty on diesel was raised to the same level as that on petrol for final consumers, the tax reform generated an additional 1.242 billion euros for the government. In our focus groups with stakeholders, we co-designed offsetting schemes to use this revenue to minimize the policy’s negative impacts.
However, policy-makers are reluctant to implement environmental tax reforms, underlining their possible adverse effects on the economy and society, especially in terms of income distribution, and accusing it of being a regressive policy. Therefore, our first question is: are all environmental taxes regressive? And to be more specific, are taxes on diesel in Spain regressive?
Focus groups and co-creation
Xaquín García-Muros
Research Fellow, BC3
Stakeholder Opinion
The design of offsetting schemes is directly linked to the initial results, given that the main goal is to offset costs to those households most affected by the measure identified in the first analysis. Stakeholder feedback helped assess the viability and social acceptability of the policy scenarios we modelled.
Most of the groups agreed that the public revenue generated by the reform should be put to practical use, though there was no consensus among the consumer and business groups. All the groups except the trade unions stressed the need to gradually reduce direct transfers or funding obtained from energy/environmental tax revenue, as such taxes are intended to be transitory.
The stakeholders highlighted that measures need to be taken to protect vulnerable households because, although such households make less use of (or do not own) private cars, their situation is so delicate that they deserve priority attention. Some also suggested that differences in impact across different regions in Spain could also be a significant factor to consider in designing both the diesel tax and potential offsetting actions
Use of the income generated by the reform
The revenue from the tax increase could be used for numerous purposes, with a range of implications for fairness, GHG emissions, and public support for the reform. Accordingly, various potential uses for this revenue were suggested in the focus groups, and participants were encouraged to put forward other ideas. The transformation of the transport sector was the option most widely supported by all groups, though there was no specific discussion as to how this should happen. Direct transfers to the households hardest hit by the measure was the second most widely discussed option. There was broad consensus on this, except among some representatives of businesses and consumers. Other options which received support, albeit with a lower level of consensus, were subsidies for purchasing of electric vehicles and installing charging stations, broader coverage for multi-energy discount schemes, and the promotion of public transport.
Stakeholers opinion: Use of the income genereated by the reform
Favourable
No consensus
Indifferent / not discussed
Unfavourable
municipalities
households
encourage the
purchasing of
electric vehicles
charging stations
discounts
public transport
the transport sector
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A
The importance of policy design
Analyzing compensations schemes
In the final stage, we analyzed three different tax reform scenarios that included compensation mechanisms. The three scenarios designed and the types of households selected as recipients of aid were determined in line with the preferences and opinions of the stakeholders. They expressed a broad consensus in terms of concern about potential regressive impacts and negative impacts of the measure on specific households such as those in rural areas, those classed as vulnerable and, to a lesser extent, middle-income households.
In the three scenarios involving compensation (Rec-D4, Rec-D7 and Rec-V&R), the additional government revenues generated by the implementation of the diesel tax increase are used to transfer fixed annual amounts of €166, €95, and €178, respectively, to households. In Rec-D4, only the poorest 40% of households would receive the compensatory transfer, while in Rec-D7 it would also be received by middle-income brackets (up to 70% of poorest households). Finally, Rec-V&R only includes the proportional transfer to all rural and vulnerable households.
Compensatory measures
Manuel Tomás
Junior Researcher, BC3
focus
Rural households
Rural households would be hardest hit by the reform. This is because residents of areas with low population densities tend to make more use of private vehicles in their day-to-day lives, as they have no alternative travel options. Therefore, in alignment with stakeholder recommendations, the Rec-V&R scenario seeks to compensate those groups which are particularly sensitive to changes in diesel prices, such as rural and vulnerable households. Its goal is to prevent any widening of gaps in society and avoid harming families in areas with low population densities suffering from population loss, where there is no alternative to private vehicles.
Final distributional analysis
In our analysis, the tax-revenue transfers correct the possible negative impacts (and even give rise to improvements in welfare) for the households most affected in the first quintiles. The scenarios with offsetting also improve welfare in the households least affected by the reform, especially in the first quintiles. This is particularly helpful for groups such as the elderly or the unemployed.
These findings show that energy/environmental taxes can be raised to speed up the energy transition while at the same time ensuring that suitable standards of social justice are maintained and even reducing inequality in Spain.
Distributional impact by compensation scenario
Rec-D4
Rec-D7
Rec-D7
Ref-Diesel
D1 is the poorest decile (10% of population) and D10 is the wealthiest decile.
Conclusions
Towards greener and fairer environmental taxation
This study analyzes the distributional impact of a hypothetical rise in the tax on diesel to the same level as on gasoline in Spain, and possible aid payments to offset its impact funded from the additional public revenue generated through the tax reform.
The offsetting schemes considered are designed jointly with various stakeholders. The results confirm that raising the diesel tax without offsets would have slightly regressive effects and that rural and middle-income households would bear the brunt of the increase. However, the effects become progressive when the co-designed offsetting schemes are implemented. These findings may help decision-makers in achieving a just, acceptable, and politically viable energy transition.
The problems
Green taxation is key to accelerating the transition to a sustainable economy and meeting the climate targets set in the Paris Agreement. However, policy-makers have been reticent, highlighting its potential adverse effects on inequality, accusing it of being a regressive policy.
Therefore, we sought to shed light on the distributional impact of raising the excise tax on diesel to the same level as that on gasoline for final consumers in Spain. We additionally explored various compensation schemes jointly designed with various stakeholders to understand how to overcome the potential negative effects of this policy.
The solutions
This study demonstrates that although the effect of increasing tax on diesel in Spain is slightly regressive, it can be turned progressive if it is combined with suitable offsetting schemes. The identification here of the households which are hardest hit enables highly targeted actions to be designed to offset impacts among them. These findings may be highly useful to political decision-makers and may help to bring about a fair, acceptable and politically viable transition to a carbon-neutral economy.
Final conclusions
Xaquín García-Muros
Research Fellow, BC3
Main conclusions
Bringing the diesel tax in line with the gasoline tax is not particularly regressive.
Stakeholders expressed concern about the distributional aspects of the reform.
Revenue recycling can determine the distributional impact of the policy, making it less-regressive or even progressive.
It is necessary to complement these policies with information campaigns to explain their impact and necessity.
focus
Presentation to the Congress of Deputies
Stakeholder engagement was intended to achieve a better understanding of what the real barriers are and how to overcome them, but also to increase the political relevance of the study. Therefore, in an effort to gather the opinion of high-level stakeholders, we presented the results of our study in the Spanish Parliament.
The objectives of this presentation were twofold: i) to reach policy makers on the need to introduce climate policies to help the energy transition, such as environmental taxation; and ii) to incorporate their concerns and opinions into the analysis, as was done with the rest of the stakeholders.
Outro
Amelia Ochoa
Communication Manager, BC3
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About BC3
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Cast
Mikel González-Eguino
Ikerbasque Professor
Prof. González-Eguino is a Research Professor at BC3 and coordinator of the Research Line 2– Transition to a Low Carbon Society with a team of 16 multidisciplinary researchers. He has a PhD in Economics and a degree in Engineering. His main interests lie in the fields of energy and climate change. He is an expert in providing scientific support for decision making in the transition to a low-carbon, inclusive and sustainable society. Mikel has provided advice to different private and public institutions such as the Basque Government, Iberdrola or the Ministry for the Ecological Transition. In 2021 Mikel was nominated as one of the most influential researchers by the Stanford University in the Ranking of the World Scientists: World’s Top 2% Scientists.
Xaquín García-Muros
Ikerbasque Research Fellow
Dr. Xaquin Garcia Muros is currently a Fellow reseracher at the Basque Centre for Climate Change (BC3). The main objective of his research is to analyse the distributional and social impacts of climate change mitigation policies and to provide scientific support for decision-making to achieve a Just Energy Transition. He was awarded a Marie-Curie Global Fellowships grant funded by the European Commission, thanks to which he has developed his research in the last two years at the Massachusetts Institute of Technology (MIT). His doctoral thesis was awarded the prestigious Enrique Fuentes Quintana prize for the best thesis in social sciences by the Fundación de las Cajas de Ahorros (Funcas).
Eva Alonso-Epelde
Junior Researcher
Eva Alonso-Epelde is a junior researcher at BC3 part of the Low Carbon group and OTEA (Observatory of energy transition and climate action). She has a master degree in Strategies and Technologies for Development and a bachelor degree in Business Management and Administration. She is currently a doctoral student at the University of the Basque Country. Her work is mainly focused on the analysis of the socioeconomic and environmental impacts of climate policies with a gender perspective. She has worked on the impact analysis of energy policies for the Ministry of Energy Transition and Demographic Challenge within the framework of the Recovery, Transformation and Resilience Plan and in the first mid-term evaluation of the Basque Climate Change Strategy (Klima 2050).
Manuel Tomas
Junior Researcher
Manuel Tomás is a researcher at the Basque Centre for Climate Change and a PhD candidate in Economics at the University of the Basque Country. He holds a degree in Economics and a Master’s degree in Economic Growth and Sustainable Development. His research analyses how energy and climate policies affect the welfare of society.
Crisitina Monge
Adjunct Researcher
Political scientist and PhD from the University of Zaragoza (Unizar), where she teaches Sociology. Her areas of interest are sustainability and democratic quality, and in particular, governance for ecological transition, a subject she works on research centres such as the Institute for Democratic Governance (Globernance), the Basque Centre for Climate Change (BC3) and the Centre for Innovation in Technology for Development (itdUPM). She is also a member of the board of patronage of the Ecodes Foundation.
Iñaki Arto
Research Professor
Iñaki Arto (PhD in Economics and a Master in Environmental Engineering) is research professor at the Basque Centre for Climate Change (BC3), where he leads the research group on “Assessment Methods and Tools”. He has previously held research positions at the Joint Research Centre of the European Commission and the University of the Basque Country. His research focuses on the analysis of the social, economic and environmental implications of the transition to a low-carbon economy..
Alejandro Rodríguez Zúñiga
Adjunct Researcher
Alejandro holds a degree in Electrical Engineering from the University of Navarra and a Master in Industrial Engineering also from the University of Navarra. He has worked as a researcher at the Basque Centre for Climate Change (BC3). His work has focused on developing knowledge and providing support for decision-making in the field of energy transition. During this period, he has contributed to the elaboration of the National Integrated Energy and Climate Plan 2021-2030 for the Ministry of Energy Transition. He has also worked at the Agency for the Cooperation of Energy Regulators (ACER) in the electricity market monitoring department. Currently, he works as an Energy Analyst in the Regulation and Climate Change department at Acciona Energía. He has published several research articles related to his field of work and has made several informative publications in different media.