A recent Central Bank of Malta research piece tries to assess the Maltese Government’s efforts to combat climate change by using fiscal policy.
The authors note that Malta’s green house gas emissions followed an increasing trend between 1990 and 2004, but that thereafter they had a moderately downward path before falling significantly from 2015 onwards. The latter development reflected substantial changes in energy policy, such as the closure of the Marsa power station, the interconnector and the shift from heavy fuel oil to natural gas. At the same time there was a rise in renewable energy.
As a result of recent developments green house emissions per capita in Malta are 33% below their 1990 level, a better result than the EU. The introduction of several government schemes also led to a rise in the use of solar panels and also less-polluting transport vehicles. CO2 emissions from new passenger cars in Malta are below the EU average and even decreased after 2016, as against the EU’s increasing trend. On the other hand, the huge rise in passenger flights since 2015 is resulting in a spike in emissions from international aviation.
CO2 emissions from new passenger cars in Malta are below the EU average.
The Central Bank’s economists present data that shows that while in absolute terms revenue from environmental taxes has risen and more than doubled since the start of the millennium, in terms of share of GDP there has been a near-constant decline. That said the share of environmental taxes to GDP in Malta is in line with the EU average.
Over the last decade, environmental taxes have reduced Malta’s deficit by about 1%, while expenditure measures to lead to climate-enhancing behaviour (such as subsidies for solar panels, etc) have averaged 0.4%. This means that looking at the balance between the carrot and the stick, the stick has tended to be used more than twice as frequently. That said there is considerable debate about whether taxes on means of transport can be seen as trying to induce climate-friendly behaviour as transport is quite an inelastic good (i.e. a necessity and not a luxury – meaning that raising its price is not that likely to reduce its use).
That said the research paper notes that in the last legislature, the balance has shifted squarely towards using incentives and subsidies. At the same time Government desisted from imposing new taxes and kept fuel prices stable.
On the other hand, the Central Bank economists note that as against these green measures there have been a number of so-called brown measures (measures that do not aid climate neutrality). These include lower duties on petroleum products and lower vehicle registration taxes. These averaged about 0.8% of GDP over the last decade.
This puts something of a dampener on things, but then looking ahead the Central Bank economists are much more positive on future fiscal policy in favour of the environment. They mention the green initiatives that will be funded through the recovery and resilience plan, where 54% of the funds will be devoted to green projects. They also mention a plethora of other major green projects such as the EcoHive, the gas pipeline, and the shore-to-ship infrastructure projects. They note the adoption of the Low Carbon Development Strategy which maps the decarbonisation path of Malta.
The paper correctly emphasises that the shift to climate neutrality raises questions about the trade-offs between short-term growth prospects and adopting more sustainable practices. The authors note that for these to shift, some sectors need to adopt different technologies. At the same time, they argue that climate neutrality needs to be achieved without unduly penalising vulnerable firms and households.
However, they are quite clear that the green shift is not a question of when or if, but a question of how. This transformation will clearly define our economy over the next decades and is the most important determinant of our future welfare.
