An energy tax revision to reduce debt, boost investment and employment and facilitate the adoption of other structural reforms

Essay submitted in July 2016 for the McKinsey Global Institute Essay Prize on “how could a pro-growth reform programme be made deliverable by 2020, and appeal to electorates and decision makers alike at the national and European level?”.

In a context of lack of confidence, depressed investment and aggregate demand as well as deflation risks, all of these phenomena occurring despite a conjunction of favourable factors (cheap oil, weaker euro and very accommodative monetary policy), we propose to take up the proposal of the European Commission to revise the Energy Taxation Directive, introduced in 2011 and withdrawn last year due to the opposition of the Parliament and the Council.

In an updated version, the energy tax would help the EU and its Member States clearing debts, lifting prices up to keep the scenario of deflation at bay and providing investors with more serious commitments about the Union’s intention to decarbonize the economy and its will to support investment in such undertakings.

Collected additional revenue would also be employed to smooth the potential immediate losses incurred by energy-poor households, and as the next step invest in retrofitting or urban public transport to diminish “structural” energy consumption. Redistributive measures are to facilitate the acceptance of the proposal, whereas its almost universal character has to create a confidence shock among investors and consumers and lay the ground for a more fundamental shift in tax base from labour income to resource consumption, and ultimately property.

The reform should be presented before the beginning of the big electoral cycle in 2017, otherwise the possible victory of a strongly Eurosceptic party in one of the largest EU countries will block any kind of EU-wide solution to the economic crisis and the Union will remain stuck in a secular stagnation.

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