Across the globe, public debt is reaching critical levels, fuelled by economic uncertainty, geopolitical tensions and renewed military spending. Climate change amplifies pressure on public finances through the growing costs of climate-related disasters and public investments needed for the transition – a transition that is essential for national security, environmental protection, social justice and competitiveness. At the same time, mounting demands for effective social policies increase the fiscal strain on already stretched public budgets.

In this context, energy taxation (which represents almost 5% of EU countries’ total taxation and 5% of Italy’s) has a crucial role to play. In addition to contributing to raise revenue, it can foster environmental and social objectives and ensure that final consumers (households and industries) are encouraged to adopt solutions that are aligned with climate goals and national security objectives, efficient from an energy and economic perspective. It is also a powerful tool to avoid inconsistencies between environmental and social goals, as well as fiscal pressure on households, consumers and industries.

The paper looks at the overall cost of energy consumption for the final consumer, which includes fiscal and parafiscal levies and the market mechanism linked to carbon pricing (ETS). Strictly speaking, however, only the fiscal components (excise duty and VAT) should be considered as energy “taxation”, while system charges and ETS are components that traditionally do not fall within this definition. However, this categorisation of the various levies borne by energy carriers – which reflects criteria for the distribution of environmental, social and energy costs borne by the community – becomes irrelevant for households and businesses, which find all these charges in their bills and have to bear their overall burden. For this reason, levies are examined comprehensively in this document, and the word “taxation” is sometimes used broadly to include fiscal, parafiscal and ETS levies.

The paper also discusses potential policy options for reviewing energy taxation, with the aim of better integrating environmental and social objectives while ensuring revenue streams for the Italian budget. These include:

• Aligning taxation on energy products with their energy content and CO2 emissions, as well as with their environmental performance, in line with the polluter-pays principle and contribution to national energy security (section 3.1). A first policy step could be to rebalance excise duties on gas and electricity, by raising those on gas while concurrently reducing those on electricity.

• Ensuring that system charges are distributed on different energy carriers consistently with decarbonisation objectives, and do not weigh solely on the electric carrier (section 3.2). This could be achieved by either shifting these levies from the electric carrier to general taxation, or by redistributing them more evenly on all energy carriers.

• Reforming environmentally harmful subsidies to ensure that public resources do not support regressive measures contrary to decarbonisation (section 3.4).

• Developing long-term scenarios for the evolution of fiscal income from energy taxation in Italy, as a tool to support policymakers in viewing energy taxation as a means to balance long-term revenue stability with the need to secure resources for financing transition and social policies (section 3.5).