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Tiago Marreiros Moreira and Filipe de Vasconcelos Fernandes of Vieira de Almeida explore the many sorts of policy objectives associated with green taxes in Portugal and forecast future developments.
Green taxation is widely recognized as critical for mitigating the consequences of climate change and global warming, as well as promoting resource allocation efficiency. This is despite the fact that green taxes is not explicitly included in the Paris Agreement.
According to the European Commission, recovery from the COVID-19 pandemic must be environmentally friendly, and in that context, the EU's flagship Recovery and Resilience Facility (RRF) – established by Regulation (EU) 2021/241 of the European Parliament and of the Council of February 12, 2021 – provides an opportunity to broaden the scope and use of green taxes in each member state.
As a result, the primary public actors, most notably the EU and its member states, are no longer just focused with income generation. Rather than that, they are interested in revenue collection as a means of inducing environmentally beneficial behavior and in'recycling' tax income connected with non-renewable items or activities in order to produce advantages or incentives for renewable vectors such as green hydrogen.
Simultaneously, the influence of Russia's present military war with Ukraine on the energy markets cannot be overlooked, with a particular emphasis on the level of natural gas prices. It is reasonable to predict that member states will exercise caution in increasing the green tax on hydrocarbons.
At least briefly, as has been the case with fuels, nations may select actions that have the least impact on ultimate consumers. In Portugal, for example, the government reduced the tax on petroleum and energy items to the extent that it raised tax collection from energy VAT.
In this sense, one can anticipate that green taxes will become more relevant than ever in the future. This is why it is critical to forecast certain key short- and medium-term trends, which we shall explore in detail with reference to the Portuguese tax system.
A taxonomy based on polygons
Green taxes, according to the European Commission, include taxes on energy, transportation, pollution, and natural resources. This means that green taxes encompass a broader range of products and services than energy taxes, which are levied specifically on energy products and electricity used for transportation, such as petrol and diesel, as well as for other purposes, such as fuel oils, natural gas, coal, and electricity used for heating.
Thus, green taxes must be integrated into a broader policy context that incorporates a variety of instruments, including price mechanisms, subsidies, standards – including those addressing environmental, social, and governance (ESG) objectives – and public infrastructure investment.
Regardless of the themes covered by the EU's Energy Taxation Directive, which is presently being revised, EU member states have considerable discretion over their tax systems, including the set of taxes that can be regarded to have a green component.
Portugal's various green taxes
Green taxes in Portugal is classified into three forms. We've included some instances of each below:
General taxation of income and consumption (CIT and VAT)
At the CIT level, good examples are the absence of autonomous taxation on the purchase of electric vehicles, and schemes such as deductible provisions for environmental damage repairs.
At the VAT level, there is the tax rate reduction from 23% to 13%, applicable to the first 100 kWh of monthly electricity consumption (only for powers above 6.90 kVA).
Excise taxes (tax on petroleum and energy products)
There is an exemption for advanced biofuels and green hydrogen, if duly certified (with Biofuel Title (TdB) or Certificate of Origin (GO), respectively).
There is also an exemption for electricity produced for self-consumption from renewable energy sources, up to a limit of 30 kW of installed capacity. The measure was included in the State Budget Proposal for 2022, which was rejected and led to early elections, and it is expected to appear again in the new proposal.
Parafiscal taxes
There is a carbon tax levied on tickets for commercial passenger air transport departing from airports and aerodromes located in Portuguese territory.
The contribution on single-use packaging applies from July 1 2022 for packaging made of plastic or multi-material with plastics. It applies from January 1 2023 for packaging made of aluminum or multi-material with aluminum.
Predicting the future of Portugal's environmentally friendly tax policy
In view of the EU's energy transition goals, it will be fascinating to examine how member states balance the need to retain tax revenues with expanding the spectrum of tax incentives available for various renewable energy segments (wind, solar PV, renewable gases, and others). This is particularly true at the general and special consumer taxation levels (VAT and excise taxes, respectively), which together account for the lion's share of national tax collections.
Given the current state of affairs in a number of member states, including Portugal, the following short-term fiscal policies are likely:
1. Adapting indirect taxes to encourage the use of renewable energy
Indirect taxes may be tailored to target new renewable energy sources, most notably renewable gases such as hydrogen and biomethane. This might involve the establishment of tax breaks on the inputs to each manufacturing step (the electricity).
In the case of VAT, exemptions are more neutral, and it is likely that they will be applied primarily on an end-consumer basis, as is already the case in some member states. For example, as is already the case in Norway, VAT exemption can be applied to the purchase of hydrogen-powered cars.
2. The rise of parafiscal sectoral taxation
Portugal has seen a dramatic revolution in recent decades in terms of so-called 'tax regulation,' with the introduction of parafiscal levies in nearly every sector of activity. When compared to ordinary tax systems, these regimes are exceedingly complicated in terms of interpretation and implementation.
Nevertheless, some of these parafiscal taxes demonstrate positive discrimination in favor of a green cause. An example of this is the exemption in the 2014 Extraordinary Contribution on the Energy Sector (CESE) for the generation of energy from renewable sources, provided it does not benefit from a fixed payment scheme.
3. Increased financial incentives for renewable energy sources
Additionally, we anticipate the introduction of incentives targeted to new renewable energy vectors, such as renewable gases.
In Portugal, a noteworthy example is the Incentive System for the Support of Renewable Hydrogen and Other Renewable Gas Production, which is financed through the National Recovery and Resilience Plan. The rule was approved on February 18, 2022, under Order No. 98-A/2022.
This incentive program, which is intended to encourage capital expenditures (CAPEX), is based on the financing of a specified set of qualifying expenses associated with renewable gas production projects. This funding will cover the difference between the investment costs for producing renewable gases such as hydrogen or biomethane and the investment costs for a traditional plant producing hydrogen from natural gas steam reforming, with comparable capacity in terms of effective energy output.
With the adaptation of the primary taxes to the issues of energy transition and decarbonisation, the fiscal state is becoming increasingly green. As a result, even for tax law enforcers, particularly tax administrations, new obstacles arise in terms of accomplishing tax law's green objectives and providing clarity to taxpayers.
By fLEXI tEAM