Planning and implementing a green tax system

By Andreas Charalambous and Omiros Pissarides

The idea of adopting a green tax system, within the context of comprehensive reform aiming to tackle the severe energy supply shortages and, at the same time, counter climate change, is receiving significant attention.

The European Commission is currently preparing a relevant directive, however, achieving consensus is proving to be a challenge. At a worldwide level, initiatives are being brought to the negotiating table, aiming at reaching an agreement on the main principles of such a reform, including the specifics of a minimum carbon tax. On a local level, the Cyprus government has announced its intention to proceed with a study for the implementation of a green tax reform, without, at this stage, revealing further details.

Unfortunately, in reality, governments in the EU, including Cyprus, appear to be giving in to pressures to reduce taxation on fossil energy products, which is incompatible with the publicly announced intentions mentioned above.

The main elements of a green tax reform should, ideally, include: (a) the transfer of the tax burden from labour earnings (salaries) to activities impacting the environment, (b) the promotion of the so-called cyclical economy, and (c) the containment of the consumption of natural resources, including basic necessities, such as conventional energy and water.

Scientific studies reveal that high tax rates are necessary to achieve the ambitious goals which are essential to preserve the environment.

The proposed reduction of taxation on labour income is in line with the objective of enhancing employment, which is particularly relevant nowadays, given the observed acute labour shortages in low skilled occupations.

The promotion of the cyclical economy should include targeted incentives for enterprises adhering to high standards regarding the reduction of garbage, as well as the compulsory recycling and repair of products.

A green oriented reform would certainly affect vital sectors of the economy, especially for Cyprus, including energy production, road transport, air transport, as well as shipping and construction. Therefore, it is deemed necessary to adopt offsetting measures in favour of vulnerable social groups, which may take the form of cash grants instead of tax reductions. Furthermore, it is recommended temporary support is provided to affected companies to facilitate their adjustment.

Achieving a consensus at EU level and, even more holistically, on a worldwide scale is necessary to avoid distortions. For less developed economies, special relief clauses should be accounted for.

In similar fashion to all important reforms, the adoption of a green tax system should be based on reliable scientific studies, extensive proactive consultation and an effective post-implementation monitoring and evaluation mechanism. The pre-election campaign for the President of the Republic of Cyprus offers an excellent opportunity for the presentation of the candidates’ views and a public discussion on this vital topic.

Andreas Charalambous is an economist and a former director of the Ministry of Finance. Omiros Pissarides is the managing director of PricewaterhouseCoopers Investment Services