Nobody likes taxes, not even politicians whenever they have to foist them on the public. But the announcement of the looming carbon or ‘green’ tax on motor fuel elicited a chorus of disapproval – from trade unions, captains of industry and consumer advocacy groups. Still, there’s a tacit understanding that the new taxes are ‘necessary’ – or unavoidable to be more exact – even as they’re set to hit low-income groups the hardest.
The ball got rolling on Friday, March 1, when a big powwow was held bringing all the major stakeholders together for a presentation of the ‘Green tax reform’. Representatives of trade unions, business groups, lawyers and accountants all showed up. It didn’t take long for the grumbles to start.
Going into damage control mode, Finance Minister Makis Keravnos promised the extra levies would not pose a threat to households and businesses, but added that people also need to “change their behaviour”.
The presentation compiled by the University of Cyprus Economics Research Centre was later uploaded to the finance ministry’s website. The same research centre has been assigned to calculate the impact of the green tax and to recommend offsets.
The document makes for an interesting read. The numbers cranked out by computer models do indeed show a small impact on individuals and businesses – at least for 2024 when the green tax on motor fuel will kick in at 5 cents per litre. There will also be an additional 1 cent fixed fee on water consumption, and a 2.5 cents green surcharge for hotel room stays.
Under the baseline scenario, the 5 cents per litre on motor fuel will rise to 7 cents in 2025 and to 10 cents in 2026. The green tax will gradually go up to 25 cents a litre by the year 2030.
The carbon levy on production fuels (industry) will come to 7 cents a litre this year, 11 cents in 2025, and 14 cents in 2026.
Regarding the overall average impact on households – percentage change in spending – it’s estimated at 0.37 per cent. This is the average of ten types of households. And the ‘welfare loss’ in monetary terms comes to €121 per household. All figures are for 2024.
Graphs show the loss of welfare is higher in rural areas than urban areas.
Tellingly, one of the slides reads: “The green tax reform is expected to be regressive. In other words, the percentage change in consumption spending is expected to be greater for low-income households.”
Translation: the less well-off will get hid the hardest.
The government insists the taxes will be fiscally neutral – the state will give back to people the extra money they’ll be spending.
So for instance, in the baseline scenario regarding the offsets, projected revenues from the green tax on motor fuel come to €52 million for this year, of which €19 million from businesses and €33 million from households.
Estimated revenues from the ‘hotel tax’ will amount to €34 million.
George Syrichas, an advisor at the University of Cyprus Economic Research Centre, told us that one of the offsets for low-income families will come in the form of a €100 cash-back to low-income families. Again, €100 for the year 2024.
“Whereas giving cash to people is not a real solution, because after all this is about folks changing their lifestyle and going green, it was decided that vulnerable groups could benefit from a cash boost,” explained the expert.
On the motor fuel tax, Syrichas said the average extra spending per household per year would come to about €60.
“Take a household that spends €100 on motor fuel a month. With the green tax, that works out to €105 a month. Multiply the extra €5 a month by 12 and you get €60.”
The economist says he understands the complaints, but stresses that the move toward ‘green’ is an imperative.
He points out that as of 2027 carbon emissions allowances will be imposed on light industry and transport. Currently emissions allowances apply for heavy industry only – electricity generation and cement factories.
“So by going green you avoid many of these costs that will rise in the future. It’s a compelling case to speed up the transition to green.”
Asked who it was that came up with the 5 cents tax on motor fuel, Syrichas said it was the finance ministry.
“They gave us the number, and we worked off of that in calculating the impact and suggesting the relevant offsets.”
A source in the finance ministry told the Cyprus Mail that the European Commission wanted to go hell for leather – Brussels asked Nicosia to levy an initial green tax on motor fuel far higher than the 5 cents.
But the government here was able to ‘talk down’ the European Commission, citing the high cost of living, inflationary pressures as a result of the Ukraine conflict and so forth.
“Essentially, green taxes will be levied on certain products,” said the source. “The intention being to change the culture/mindset – away from fossil fuels and toward electric vehicles and solar panels.”
Normally Cyprus should have imposed these taxes by January 1. But the government managed to get an extension. It now looks like June is the absolute deadline.
Added the same source: “The tax system overhaul, of which the green tax reform is only a part, is geared at engendering a shift away from the services sector and tourism, toward the high-tech sector. But this is a long-term plan.”
Asked whether the planned offsets will in fact help people, the source insisted they would. He cited the ‘Photovoltaics for all’ scheme, which will significantly drive down electricity costs for beneficiaries.
But the scope of the scheme will cover only a few thousand households.
Commenting on the University of Cyprus presentation a week earlier, the PEO union was none too happy.
PEO’s Sotiroulla Charalambous called for “a wider social policy” to counter the impacts of impending green taxation.
“Compensatory measures and incentivisation towards more sustainable behaviours must be aimed in the right direction if people are to be prevented from slipping into poverty,” she said at the time.
The union boss cited the example of one measure under discussion – providing households with free public transportation after the new tax makes car travel prohibitively expensive.
“This is an unfeasible solution [while] the infrastructure for public transport remains subpar,” she noted.
She also pointed out that subsidies for electric vehicles are currently exclusionary, being realistic only for those with high incomes. She suggested that if the goal is to encourage sustainability, the state should consider subsidising acquisition of electric vehicles up to 80 per cent for some segments of the population.
Meantime the reaction from the business community has been somewhat subdued – but definitely unenthusiastic.
The Employers and Industrialists Federation (OEV) told us they’re currently preparing an in-house proposal regarding offsets for businesses. With the clock ticking, they aim to finalise the document by March 27 and put it to their executive board, so that it can then be adopted as OEV’s official position paper.
“Our proposal will envision a zero fiscal impact on businesses,” said OEV general director Michalis Antoniou.
“We knew all along that the transition to green would be a painful one. But Cyprus accepted the European Green Deal, and now we have to honour our commitments. Going green is a one-way street. So you either have to pay now, or later…but you have to pay.”
Still, industry has serious reservations about the way the government is going about it.
“Say the private sector were to somehow go fully green on day one, there’s no infrastructure for it in place. I mean, just look around you…even our electricity system is based on mazut.”
Antoniou also complained that whereas the public sector has got some relief from the days of the 2013 bailout – the salary cuts have since been rescinded – the same cannot be said for the private sector.
“For instance, we’ve still got a high corporate tax at 12.5 per cent. Maybe we could go back to 10 per cent.”
