The Bank of Spain describes the incentive and improvement as necessary for progress. It argues that environmental taxation can move the economy forward more efficiently and at lower costs during the ecological transition. Revenue growth in this area could offset the transition costs for vulnerable companies and families while allowing other taxes to be reduced.
In a climate section of its Annual Report, the supervisor stresses that public policies, especially fiscal measures and the regulation of economic activities, must play a leading role in the ecological transition so that governments and parliaments have the legitimacy to set when and how the economy and society should transform, with means that are broader, more detailed, and adequate to achieve the proposed goals in the most efficient way.
Ángel Gavilan, Director General of Economy and Statistics at the Bank of Spain, states that the central tool for governments should be environmental taxation. Spain still has a long way to go, ranking among EU-27 economies with relatively low environmental taxation and a gap of almost one percentage point compared to the two-decade EU average.
Spain after all remains cited as lagging in green taxation, according to Europa Press reports highlighted in the analysis, with a notable negative difference in 2019 driven largely by reductions in energy and especially hydrocarbon taxes.
Redesign taxation and reduce other taxes
Environmental taxation stands as the key to the ecological transition. Progress must be pursued in this area, redesigning and optimizing environmental taxes, Gavilan emphasized. He noted that the White Paper on Tax Reform, released in March, could serve as a starting point for a broader review of environmental taxation in Spain.
Gavilan suggests that increasing environmental revenues could reduce distortions created by other taxes. He noted that raising environmental taxes can generate more revenue while lowering labor taxes, which are often skewed against work and investment, thereby positively shaping business operations.
On the other hand, the Bank of Spain warned about the impact of physical and transit risks. A predictable rise in prices for the most polluting goods and services is expected to vary across sectors, companies, and households.
For families, the effects would be more pronounced among lower-income households, households led by those aged 35 to 45, rural residents, individuals with lower educational attainment, and larger households.
Regarding companies, the Bank of Spain’s CATS model shows that if emission right prices rise much like in previous years (from €25 to €100 per tonne CO2 between 2019 and February 2022), sectors most affected after energy will include air freight and paper products, among others.
Moreover, expanding the scope of the system would intensify effects on the transportation sector (sea, air, and land) and the agriculture, livestock, and fishery sectors. Small firms would experience greater impact than large firms.
The Bank of Spain believes it is appropriate for public policies to establish mechanisms that temporarily compensate the most vulnerable households and companies. For fairness and efficiency reasons, it is crucial that those most affected by the ecological transition support the process to sustain its speed and impact.
In this framework, some revenue growth from environmental taxation could fund compensatory measures that reduce the transition costs for the most vulnerable groups and enterprises.
Get funding for the ecological transition
Apart from deterring the most environmentally harmful activities through taxation, fiscal policy should foster large-scale investments needed for the transition and encourage private investment in green technologies through subsidies.
The supervisor also outlines initiatives that set air quality targets, energy performance standards for building upgrades and renovations, automotive manufacturing requirements, and targets for increasing the share of renewable energy in electricity generation. It also emphasizes that active participation by the financial sector is essential to tackling climate change and mobilizing the vast resources needed for the ecological transition.
To fulfill this objective, it is important that all participants in the financial system and capital markets can accurately assess how exposed they and other economic actors are to various physical and environmental risks associated with climate change and the transition. They should be actively involved in managing these risks.
In terms of regulation and prudence, the Bank of Spain notes that it works to ensure that credit institutions are prepared to identify, measure, manage, and report financial risks related to climate change that influence the ecological transition. The banking sector is exposed to climate-related risks largely through loans to productive activities. The Bank of Spain’s top-down analysis shows a modest short-term impact of climate risks on the Spanish banking system.