New tax on the way for fuel

A new carbon tax is on the way, the government confirmed on Tuesday, at a time when households are already heaving under the pressure of rising fuel prices impacting the cost of living.

Permanent secretary at the finance ministry Giorgos Panteli told the Cyprus Mail that the new tax on fossil fuels is part of the so-called ‘green transition’ and comes as part of Cyprus’ commitments to the European Union – specifically the commitments under the national Recovery and Resilience Plan.

On paper, the government should impose the carbon tax by the end of 2023. But Panteli said that, in practice, Cyprus can get a small extension on that deadline.

“Probably sometime in the first quarter of 2024,” he said.

Despite being asked directly, the official would disclose neither the approximate tax rate nor whether it will be substantial.

He did say that before the carbon tax is levied, the government will have designed offsets – taking some of the sting off the new tariff.

Daily Phileleftheros, which broke the story, reported that the government has assigned the design of the offset benefits to the University of Cyprus’ Economics Research Centre.

The newspaper said that just last Friday the Research Centre made an initial presentation to the finance ministry.

The Research Centre has been tasked with the project of assessing the impact of an overall tax reform for Cyprus, and recommending offsets. The carbon tax and the associated offset benefits are a part of it.

This was confirmed by George Syrichas, an advisor at the Research Centre who attended Friday’s meeting. Also attending that gathering was Finance Minister Makis Keravnos.

“The carbon tax issue is only a small part of the planned tax overhaul,” Syrichas told us.

“We’ve been assigned by the sponsor – the finance ministry – the project of assessing the impact of the planned tax reform, with the final deliverable set for around September 2025. The tax overhaul itself will include such things as corporate tax, income tax and so forth.”

In the interim, the Research Center will produce standalone deliverables – such as the one on the carbon tax.

Syrichas said they’ve been given until November to design offset benefits for the carbon tax. The government wants to have these recommendations in place before imposing the new levy.

“So in terms of when the carbon tax would be enacted, most likely not this year… it’s looking like during the first half of next year,” he said.

Likewise he declined to specify the tax rate.

“We’ve got certain models in place, and once the government tells us the exact tax rate, we’ll input the numbers into our models.”

The economist did say that the offsets will be targeted rather than one-size-fits-all.

“The offsets will be designed for households based on their income bracket. For each bracket we will calculate the loss of income and then propose the corresponding offsets.”

These offsets might come in the form of direct cash injections and/or subsidies for installing solar panels.

“The objective here is not for the government to raise taxes for the sake of raising taxes,” stressed Syrichas. “The measures are intended to be fiscally neutral, so that whatever the government takes it will give back in some other form.”

The entire purpose of the exercise, he added, is to discourage the use of fossil fuels on the path to the ‘green economy’.

“We’re already behind in this area, so we need to speed things up,” he said.

Since at least 2021 former finance minister Constantinos Petrides had been telegraphing new taxes on fossil fuels. But the measures were apparently put on hold due to the spike in fuel prices in the wake of the conflict in Ukraine.

At any rate, and perhaps paradoxically, news of the impending carbon tax comes at a time when the government has intimated possibly bringing back relief measures related to the use of fuel – such as the lower consumption tax on motor fuel and subsidising electricity bills.