Decarbonising the energy consumed in transport and buildings will be much more difficult than decarbonising electricity because it requires, inter alia, changing consumer habits, replacing vehicle fleets and heating/cooling systems, and making significant investment in infrastructure, according to the latest report by the Oxford Institute for Energy Studies (OIES). It stressed that as consumers will be at the centre of this energy transition, it is important to minimise energy pricing distortions, including those due to fiscal policy.
To date, most decarbonisation in the EU has involved improved energy efficiency and the decarbonisation of electricity through the penetration of renewable power and a reduction in the use of fossil fuels in generation. However, while policy support for these efforts must continue, the focus must now turn to decarbonising transport and buildings, which account for about 60% of EU energy-related greenhouse gas (GHG) emissions, according to the OIES report titled 'Fiscal Policy for Decarbonisation of Energy in Europe'.
The Paris Agreement committed the international community to achieving carbon neutrality between 2050 and 2100. In that context, the EU has a binding target of reducing GHG emissions by 40% in 2030 and a political objective of reducing them by 80 – 95% by 2050, in both cases compared to 1990 levels.
The report argues that fiscal policy may act as a barrier to the decarbonisation of transport and buildings, ʺdue to levies on electricity that have risen substantially since 2008, primarily but not exclusively due to financing of renewable power development whose costs could not be recovered through markets. The higher the penetration of renewable energy, the higher the levies on electricity and the less competitive it becomes by comparison to fossil fuelsʺ.
The report also argues that even if the fiscal policy barrier were eliminated, electrification is ʺonly one of the options for decarbonising end markets and may be more expensive than alternatives, especially in countries with a high penetration of natural gas or in markets such as maritime transport where electricity may not be the least cost solution. To encourage competition among alternative low-carbon technologies, fiscal policy reform should be neutral with respect to the options that will contribute to the clean energy transitionʺ.
In the report, the OIES proposes guidelines for energy sector fiscal reform that will be aligned with efficient decarbonisation. According to the report, fiscal policy should, inter alia, be technology neutral after internalising environmental externalities; finance the extra cost of renewables and other public goods through government taxation raised in the least distorting ways consistent with distributional objectives; and be part of a comprehensive revenue-neutral fiscal reform.
ʺFiscal policy is only one of the policy instruments that governments have at their disposal and it is often not the most important one. However, fiscal reform is a relatively easy and quick way of starting to move in the right direction and of reducing the risk of getting stuck with the wrong sort of investment that will lock in high carbon intensity,ʺ added the OIES.
The whole report can be found HERE.
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