Nova workboard

a blog from young economists at Nova SBE

Green Fiscal Reform

Nowadays in Portugal the Portuguese Households and Firms are under a high tax burden, due to the fiscal constraints on the Public Administration. To promote an environmental mandate of taxes the Portuguese Government has created a Commission to study a Green Fiscal Reform over its Fiscal Structure.

Such Green Reform has as main objectives:

– Contribute to eco-innovation and efficient use of resources

– Reduce dependence on foreign energy

– Induce more sustainable patterns of production and consumption

– Promote entrepreneurship and create jobs

– Achieve efficiently international goals set by Green Treaties

– Diversify revenue sources, always having in mind a neutral change of the tax system

On a technical point of view the orientation of this reform aims to decrease the negative externalities, which arise from the Portuguese economic activity and put in risk the sustainability of the same.

Negative externalities, the so called market failures in economic theory, are the costs from an individual decision, either from an household or a firm, not supported by the decision-maker and passed onto society impacting not only them but also the remaining. In this case the pollution created by individuals, when driving to work or energy firms when producing electricity, will affect the Portuguese environment and hence economy,.

To decrease negative externalities more sustainable patterns of production and consumption are required. A reform of the Portuguese fiscal system targeting an increase of green tax revenues shares on the overall Portuguese tax income, maintaining the total sum of taxes untouched, will direct Households and firms for such patterns.

On green taxation the Portuguese Government is discussing the creation and aggravation of:

– Tax on Carbon Emission

– Tax on Air Transport of Passengers

– Tax on Plastic Bags

– Tolls on Cities entrances

Following the assumption from the Input-Output model considered in economics, that prices for final goods are determined by its own production costs, the increase in taxation will increase costs and hence prices. In this case increase in taxation will cover highly polluting sectors of the economy such as the Energy Sector, the Air Transport Sector but also un-environmental habits such as the general use of plastic bags and private transportation.

The new taxation, by increasing costs for Firms on such Sectors creates incentives for companies to restructure its production patterns for more advanced, less polluting technologies. So as to circumvent taxes, always having into mind the maximization of profit, known as the Firm’s Problem in economic theory, Firms will turn to ecological production methods.

To induce a new sustainable consumption pattern over Portuguese households, increasing prices over goods whose production methods are decidedly polluting, will direct households for “greener” goods whose prices remain constant, directly intervening over what in economic theory is known as the Consumer Problem.

Within the current context of the Portuguese Economy, the increase of green tax burdens over Firms and Households, already overloaded by taxation is offset by a decrease of tax segments. The Commission for the Green Fiscal Reform estimates an increase on tax revenues of 165 M€, according to the Draft for Green Fiscal Reform. This increase in taxation will be used in the following terms:

– 25% for Personal Income Tax

– 25% for Tax Credit for Investment

– 50% for Social Rate of Employers

These measures will have a positive impact over the income of Households, what in economic theory is called Budget Constraint; and a decrease in labour costs for Firms.

The re-arrangement of the newly aggravated green taxes will balance its negative effects over Economic Agents as also potentiate economic growth.

On a personal note, I do defend an increase of green policies such as green taxation having as a main objective an increase of the sustainability of the Portuguese Economy. A decrease over main tax segments such as the Personal Income Tax to balance these policies is also positive in my opinion taking into account the coagulant levels of taxation for the development of economic activity in Portugal.

However it is curious the electioneering tone that such a reform has, when presented for 2015, the year of Parliamentary Elections in Portugal.

Jaime Marques Pereira, Nº716


Vasconcelos, J., Arnaldo, A., Brigas Afonso, A., Lobo, C., Roseta Palma, C., Dias Soares, C., Araújo, F., Silva Lopes, J., Alves, M., Ferreira dos Santos, R., 2014. Projecto da Reforma da Fiscalidade Verde

2014, Sobre os Efeitos Ambientais e Económicos de uma Nova Tributação do Carbono em Portugal, Relatório Técnico de Avaliação a Submeter à Comissão de Reforma Fiscal Ambiental 


Author: studentnovasbe

Master student in Nova Sbe

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