As the government explores new relief measures for citizens to combat the continuous price increases, including the possibility of reducing consumption tax on fuels, they are paradoxically preparing for new taxes on fuels as part of a green taxation reform, which may precede broader fiscal reforms.
The so-called green taxation is an obligation for the Republic of Cyprus and other EU member states.
Phileleftheros has learned from the Ministry of Finance that the implementation of the green tax must be in place by the end of 2023, at least according to Cyprus’s commitment to the EU Recovery Plan.
To mitigate the impact of green taxes on household budgets, especially concerning the price of liquid fuels (essentially an increase in consumption tax on fuels), the Economics Research Centre at the University of Cyprus has begun working on compensatory measures upon request from the Ministry of Finance. They are studying various scenarios and assessing the impact of green taxation on households, depending on their composition and income levels, as well as on businesses.
Moreover, as stated in presentations made during the inaugural meeting of the “Comprehensive Tax Transformation” project led by the Centre, these proposals should be ready by the end of November.
Elena Andreou, head of the Economics Research Centre, mentioned that this tax transformation project would be completed in 24 months, with the first recommendations on green measures and compensatory measures expected in two months (November 2023). Professor Panayiota Lysiotou, was more revealing about the reforms, stating that within the framework of the National Recovery and Resilience Plan, there is a commitment to introduce a carbon tax on fuels to address climate change and atmospheric pollution.
Searching for compensatory measures
Professor Lysiotou, discussing the impact of the carbon tax, mentioned that it is expected to increase the selling price of fuels, potentially reducing household well-being. However, the goal is to limit its negative impact on households through compensatory measures.
As part of this project, the Economics Research Centre is analysing the distributional impacts of such taxation on households with different characteristics (e.g., income levels, household size, and composition).
As revealed in the presentation by Professor George Syrichas about the phases of tax reform, the first proposals for green taxation and compensatory measures will be ready by the end of November. However, this does not necessarily mean that green taxes will come into effect either by the end of this year or at the beginning of 2024, particularly if fuel prices continue to remain at their current high levels.
Furthermore, in the past, fuel price fluctuations have prevented the introduction of green taxation alongside simultaneous compensatory measures. It is worth noting that as of 2021, former Finance Minister Konstantinos Petrides had publicly announced plans for further taxation of liquid fuels, coupled with relief measures in labour taxation. However, these initial plans were postponed due to the Russian invasion of Ukraine and the surge in inflation.