From the EU policy perspective, although this type of taxes are considered an important instrument to contribute to the decarbonization of economies, the lack of greater harmonization of environmental taxation leads to an uneven implementation at Member State level.

Spain provides an interesting case in which the challenges and complexity of the use of these instruments can be observed. One of the most characteristic features of the Spanish case is the jurisdictional complexity created by the distribution of competencies in taxation among the central government and the regional and local governments. This has led to the existence of a multiplicity of instruments that do not necessarily follow a coordinated strategy and of which the environmental ambition is often limited.

The research conducted in the case study has led to the following main conclusions. From the EU perspective, the decision-making processes in certain aspects such as taxation, which require a unanimous vote, have limited the actual capacity of the EU in regulating and influencing Member States’ policies in that area. We have observed that the scope of the EU Energy Taxation Directive is reduced to energy taxes and the environmental goal only has a secondary role leaving much of its implementation to the will of each Member State. Also, the only mechanism allowing to enhance its environmental potential was through the use of exemptions to specific sectors or technologies, but exemptions were also available to address competitivity issues which could lead to inconsistencies within the policy.  Additionally, the lack of review of the taxation rates since its implementation in 2003 further limited its environmental capacity.

Focusing on the case of Spain, we see how the levels of environmental taxation during the 2005-2021 period have remained among the lowest of the EU Member States. Although there are instruments that are by definition considered environmental taxes, their environmental effectivity remains quite low. In the study we identify how there are challenges regarding both the ambition and the design of the instruments. In general, for most taxes—although they might have a modest capacity to influence behaviours towards more environmental responsibility—the main focus has remained to generate revenue. We also observe limited impact due to design flaws that do not adequately deal with the addressed externality in a way that minimizes its impact. Thus, the general conclusion at the national level is that it is a missed opportunity to take advantage of the potential of environmental taxes to contribute to achieve decarbonization goals.

Although the academic literature supports that one of the ways in which environmental taxation contributes to decarbonization is by incentivizing technological innovation, the impact in the case of Spain can be considered modest at best. The lack of availability of specific data makes it hard to quantify with precision the extent of this impact, but what seems clear is that its full potential is missed. This is coherent with the conclusions presented in the study on the shortcomings of the existing instruments in particular and of the system as a whole.

Related to integration, one of the main challenges concerns the coordination and coherence among jurisdictions. This lack of coherence seems to be partly due to the intrinsic complexity of coordinating a large number of institutions with particular political and social agendas. But also during the reviewed period, there did not seem to be a clear ambition from the central government to use this type of instruments and to search for coordinated action with the regional governments, nor from the regional governments to seek for coordination amongst themselves.

Another important aspect that the analysis has revealed is the potential conflict among instruments targeting to mitigate different externalities. We have cited the example of taxes targeting the visual impact of wind energy infrastructure which can put this technology in a disadvantaged position compared to more polluting ones from an emissions perspective. In this case, again, better coordination and better policy design are needed to try to mitigate these undesired effects.

Download the case study here.

Read more about the overview report here.