Nicosia: The cost of transitioning to net-zero energy is significantly impacted by the selection of policy mixes, particularly the effective use of carbon tax revenues.
According to Cyprus News Agency, the findings are detailed in a European Commission paper aimed at evaluating the macro-fiscal risks associated with climate change, by examining country-specific approaches and insights. A post on X by the Ministry highlights that the paper is designed to encourage reflection on assessing macro-fiscal risks from climate change, especially in light of the upcoming 2024 climate-related amendments to Directive 2011/85/EU concerning Budgetary Frameworks of Member States. The paper provides an overview of key concepts, explores potential methodological approaches and tools, and presents examples of emerging practices across Europe.
In terms of Cyprus, the paper references a three-year research initiative by the Ministry of Finance, in partnership with CyERC, focusing on climate change and its economic impacts on Cyprus. The project’s aim is to evaluate the economic and fiscal consequences of climate change on essential sectors, analyzing its implications for public debt and the country’s broader development model.
The project supports Cyprus’ commitment to the European Green Deal and the Fit-for-55 package, as outlined in the nation’s revised Integrated National Energy and Climate Plan (NECP). In 2024, Phase 2 of the project conducted a model-based assessment of the economic impacts of energy transition policies, evaluating scenarios involving various policy instruments such as carbon taxation, green subsidies, policy mixes, and tax reforms that shift burdens from labor and capital income to energy taxation.
The simulations offer qualitative and quantitative insights into the macroeconomic effects of these policies in the short to medium term, considering variables such as output, employment, inflation, and their impact on achieving Fit-for-55 targets. The research emphasizes that the cost of the net-zero energy transition is highly dependent on the chosen policy mix, especially the efficient use of carbon tax revenues.
The findings were incorporated into Cyprus’ draft budgetary plan for 2025 and its medium-term fiscal structural plan for 2025-2028. Upcoming actions include extending the analysis to assess the impact of new climate change mitigation fiscal instruments, changes in the spending-tax mix, effects of monetary policy decisions, and the physical impacts of climate change. Cyprus also plans to integrate this analysis into its economic forecasts.
The paper concludes by mentioning that the Cypriot Fiscal Council participates in an ongoing Technical Support Instrument project, which supports independent fiscal institutions in five countries, including Cyprus, to integrate climate change-related risks into their debt sustainability analysis models.