Bank of Spain demands more environmental taxes

by Lorraine Williamson
environmental taxes

MADRID – The Bank of Spain sees it as “essential” to levy more environmental taxes and improve existing environmental taxes. With that tax revenue, the economy could move forward efficiently and at lower costs in the ecological transition process. 

With the extra tax revenues, other taxes and the transition costs of the most vulnerable companies and families can be compensated. 

Ecological transition 

The financial regulator published its annual report and devoted a chapter to climate change. In it, the institution emphasises that public policy must play “a leading role” in the ecological transition. This is especially in the field of taxation and the regulation of economic activity,

Spain is among the countries with the lowest relative environmental tax collection 

Ángel Gavilán, general manager at the Bank of Spain, sees environmental taxation as the most important tool governments should use. And in that area, he says, Spain has “a long way to go”. Spain consistently ranks among the EU-27 countries with the lowest relative collection of environmental taxes. 

Environmental impact is the key to the ecological transition 

“Environmental pressures are key to the ecological transition. Progress needs to be made in this area, environmental pressures need to be redesigned and optimised,” emphasised Gavilán. He further pointed out that last March’s White Paper on tax reform is just a starting point. And that a possible comprehensive review of environmental taxes in Spain would follow. 

According to Gavilán, the increased environmental collection could reduce the tax distortions caused by other taxes in the economy. “If you simultaneously increase the environmental tax, which allows you to collect more money. And at the same time decrease the tax on labour, which is very disruptive, you can have a positive effect on the activity,” he explains in the newspaper Eleconomista.es. 

Temporary compensation of costs of vulnerable companies and households 

On the other hand, the Bank of Spain warns that the impact of physical and transition risks, with the foreseeable increase in the price of the most polluting goods and services, will be heterogeneous between sectors, companies, and households. 

Consequently, in the case of families, the effect will be greater for those;

  • on lower-income households
  • with heads of household between 35 and 45 years of age
  • living in rural areas
  • with a lower level of education. 

As for companies, the bank points out, based on models, that if the price of emission allowances were to increase in the same way as in recent years (from €25 to €100 per tonne of CO2 between 2019 and February 2022), the hardest hit after the energy sector are the sectors for

Other companies in the transport sector and the agricultural, livestock, and fishing sectors are also affected, smaller companies more than larger ones. 

According to the Spanish bank, the government should come up with mechanisms to protect vulnerable households through temporary compensation schemes. Therefore, in this regard, the Bank of Spain indicates that with a higher environmental tax, compensatory measures can be deployed. Furthermore, these would reduce the costs of the ecological transition for the most vulnerable households and companies. 

Need to evaluate government policies 

In addition to discouraging the most environmentally harmful activities with higher taxes, fiscal policy should also play a fundamental role in promoting the high volume of investment needed to ease the transition, the regulator said. Furthermore, it is considered “desirable” to encourage private companies to invest in green technologies through subsidies. 

The Spanish bank also wants governments to do more to promote the ecological transition based on new regulations. These include initiatives to improve air quality, energy performance standards in building renovation, specific standards in car manufacturing, and targets related to renewable energy generation. 

Public policies must “in any case provide security to the different economic actors” while promoting a stable operational framework in which they can adapt their consumption and make investment and production decisions with maximum guarantees. 

Active participation in the financial sector is essential 

The Bank of Spain report also highlights that, to mobilise the huge amount of resources needed to fight climate change and the ecological transition, the active participation of the financial sector is essential. Also, institutions must be prepared to identify, measure, manage, and adequately report the financial risks associated with climate change that contribute to the process of ecological transition. 

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