Filenews 6 February 2021 - by Angelos Nikolaou
As part of the broader tax reform, the Ministry of Finance is also moving forward with green tax reform, which includes, among other things, significant burdens on conventional fuels, while at the same time exempting other sectors. In the first preliminary studies of the Ministry of Finance, things are not at all encouraging for those who drive in private cars and heat their homes with liquid fuel.
The final form of the policy is expected in the second half of 2021. However, it is not out of the question that Brussels will catch up with the Republic of Cyprus as part of the revision of the European Emissions Trading System (EES) until June 2021 when there is talk of extending the system to new sectors other than the already included sectors of industry and electricity and heat generation.
Specific objectives are to extend carbon pricing and the emissions trading scheme to sectors such as buildings, road transport, air transport and shipping. Therefore, the charge will be by decision of the Commission and fuel suppliers will purchase rights to supply motor fuels and heating to the market.
As far as the plans being processed by the Ministry of Finance for environmental tax measures are concerned, they include a carbon tax in the energy sector, a charge on water supply and a land tax. For natural resources it is proposed to introduce within two years a charge for water supply corresponding to the estimated cost of water scarcity and the cost of the environmental impact of water use in Cyprus. As regards the landfill-site charge, there is provision for the introduction of a single pancyprian charge for ordinary household waste, with the imposition of a landfill-site tax covering the cost of waste management in Cyprus.
At the same time, it is proposed to abolish environmentally harmful subsidies. As far as transport is concerned, Cyprus has already implemented a green tax reform on vehicle registration and excise duties since 2014, which was further revised in March 2019.
In particular, with regard to the carbon tax, it is gradually proposed to introduce it for the period 2021-2026 for all fuels used in the sectors of the economy which do not fall under the Greenhouse Gas Emissions Trading Scheme (EIA). A tax of €20/tonne CO2/year is proposed from 2021 so that by 2026 the carbon tax will reach €120 per tonne.
The impact of the introduction of the proposed carbon tax will be for every liquid fuel used in Cyprus, i.e. petrol, diesel, heating oil, LPG and light fuel oil. For 2021 the tax on petrol will be 4.6 cents/litre and staggered to 2026 at 27.6 cents/litre. In diesel/heating oil the tax in 2021 is 5.43 cents/litre and in 2026 it will reach 32.56 cents/litre. In LPG the tax in 2021 will be 3.04 cents/litre and will reach 18.25 cents/litre in 2026 and light fuel oil 6.04 in 2021 and will reach 36.26 cents/litre.
The introduction of the carbon tax calculates an increase in household spending ranging between €168 for the poorest and €989 for the richest households (1.3% of average income) per year.
At the same time, energy savings of 100-130 ktoe or 6-8% are estimated from 2025 onwards, which also entails a reduction in the cost of importing fuel by €60-97 million. per year.
The impact on the road transport sector with its dependence on petroleum products is also considered significant.
Only from the carbon tax and taking into account the reduction from excise duty due to reduced fuel consumption, the net income of the Republic including VAT of 19% will be provided for in €70.6 million. in 2021, €129.5 million in 2022, and in 2025 will amount to €311.5 million.
What is included in the proposal of the Ministry of Finance
Turning to more efficient use of the economy's resources for environmentally sustainable development includes the Treasury's plans for green tax reform. The objectives of the policy are environmentally rational and sustainable development by disconnecting it from the consumption of non-renewable resources, promoting the use of non-energy raw materials and at the same time reducing the use of energy-efficient raw materials. Furthermore, they are achieved by integrating the environmental aspect into economic policy-making, including through green tax reform, fiscally neutral and reducing environmentally harmful subsidies.
What the Republic and the citizens gain
• Contributes to the achievement of environmental objectives.
• Reduces distortions in the economy by abolishing subsidies for vehicle use and waste of energy, water, waste.
• Changes the correlation of values between activities depending on how much they harm the environment.
• Boosts innovation and "green" investments in energy, environmental protection and waste reduction.
• More efficient use of resources.
The disadvantages
• Increase in household spending on energy products.
• Increase production costs for some businesses.
• The carbon tax will be charged proportionally more (up to more than 50%) the price of fuel oil used by certain industries.
Tax revenues are returned to citizens
According to the National Energy and Climate Plan 2021-2030, it will be pursued that the proceeds from tax burdens on polluting activities be returned to citizens, such as by reducing labour costs and other compensatory measures.
Fiscally neutral reform by reducing the tax burden on labour resulting in a reduction in labour costs for businesses and maintaining/increasing competitiveness and employment.
Reducing labour costs is important because labour costs are borne by other policies and green tax reform affects production costs.
Compensatory measures to ease the tax burden on households in order to protect low incomes and maintain disposable income. Compensatory measures for vulnerable groups of the population.
Using part of the proceeds to promote energy-efficient homes and vehicles - it helps to increase investment in these areas - thus promoting the decoupling of economic growth from the use of resources and the environmental benefit of the whole green reform.
Compensatory measures
● Tax measures to be considered taking into account the new conditions created by the pandemic and the burden of adopting new measures.
● Introduction of a Plan to encourage the purchase of hybrid vehicles valid for a period of 5 years from the adoption of the carbon tax.
● Extension of the existing Plan to encourage the use of RES and energy savings in dwellings.
