Policy Note 57: Climate neutrality in 2040 – decarbonization requires a rethink of the tax structure

Austria is to become climate-neutral by 2040. This will also have an impact on future tax revenues. This is due to the fact that a significant proportion of public tax revenue is based on the taxation of fossil fuels. If the share of fossil fuels in energy consumption continues to fall, public revenue will also be lost. This includes, for example, the mineral oil tax and, due to the link with CO2 emissions, the motor-related insurance tax. These tax revenues must then be replaced either by savings in public spending or other levies.

Specifically, the results of the latest EcoAustria Policy Note show that up to 7.7 percent of tax revenue could be lost in future as a result of decarbonization. This corresponds to almost 25 percent of income tax revenue.

Although the decline in revenue from corresponding levies and environmentally relevant payments must be gradual and not full, it is nevertheless necessary to think about how to deal with this development. The tax structure is already heavily concentrated on income taxation. Together with the high tax ratio in Austria compared to other countries, this poses particular challenges for the domestic economy in order to survive in international competition.

Although the longer transition period allows the implementation of measures that can be well prepared, it also harbors the risk that the necessary steps will be postponed and ultimately implemented hastily - at the expense of the business location. "The decisive factor for the business location and competitiveness is the leveraging of efficiency potential and the associated reduction in public spending," says Ludwig Strohner, Head of Public Finance Research at EcoAustria. In previous studies, EcoAustria has already shown that although Austria has high expenditure in an international comparison, the associated results are mostly in the midfield. This is often a consequence of the separation of tasks, expenditure and financing responsibilities in the federal system.

From EcoAustria's point of view, it is therefore essential to refrain from raising taxes. Austria has lost much of its competitiveness in recent years. High energy prices and wage settlements as well as the sharp decline in average working hours have considerably damaged the quality of the location. Further taxes would undermine international competitiveness even further.