This is the third publication of a funding proposal for the Climate Jobs campaign in Portugal, following the two previous publications:
Funding Climate Jobs — Izaura Pires de Carvalho, Gonçalo Pessa, José Ricardo Sequeira i
How to Fund Climate Jobs in Portugal — Jonathan Neale ii
Below is a new funding proposal for the new Climate Jobs report. This proposal aims to raise €9.924 million on an annual basis to achieve the campaign’s objectives throughout its duration.
As with previous proposals, this new funding proposal for supporting Climate Jobs proposes increasing funding via increasing personal income tax (IRS) on higher incomes, fighting tax evasion, employing European funds and implementing monetary policy under the aegis of the European Central Bank (ECB).
However, this proposal also departs from previous ones. This is partly due to the altered economic situation, particularly abruptly during 2020. For example, the current version proposes a larger increase in personal income tax at the highest levels, contextualises monetary policy in the light of the previous year’s events, adopts different forms of combating tax evasion and explores more deeply ways of using current European funds from the multiannual financial frameworks. Other differences focus on untaxed financial transactions or the increase in fiscal deficits.
Climate and Political-Economic Paradigm
A consensus has emerged over the past few years surrounding the fact that the climate crisis represents a threat to the preservation of decent living conditions. We have roughly 10 years to achieve drastic changes in not only how we produce energy, but also how we consume it.iii
Achieving this will require a fundamental economic transformation. Programmes such as those presented by Climate Jobs are crucial. Changes in transport, energy production, forest management and beyond have to happen fast and major investments are needed.
The need for State intervention and investment converges with what is currently needed in the economy, with a strong need for strong stimuli to overcome the recessive economic situation in which we find ourselves.
The COVID-19 pandemic severely disrupted economic activity the world over. Stimulus plans were immediately approved on an even larger scale than those used in response to the great financial crisis of the past decade.
The European Commission’s stimulus package, totalling €750 billion of grants and loans, is an initiative with few precedents within the European policy space. On the monetary policy front, the European Central Bank has come to play a more active role, its own policies of asset purchases and emergency lending having pushed the institution’s balance sheet up to around 68% of the annual gross domestic product of the Eurozone as a whole by the end of 2020.iv These two dynamics become an essential discussion in any public spending policy in Portugal.
However, it cannot be said that this rediscovery initiative by the states is meeting the need to solve the climate crisis. To a large extent, the money has been injected into what can be called “zombie companies,” in which already unviable companies stay afloat thanks to state support. Going back to the end of 2007, the Portuguese government injected €25.5 billion into the banking system through nationalisations and loans, of which only €6 billion has been recovered to date.v
The scale of state intervention in the economy was largely discarded over the last decades when it came to solving social problems. However, various exceptions were made, for example when the banking sector was under threat.vi
This is especially explicit on the monetary policy front, with the latter having a legacy of supporting fossil fuels in its Quantitative Easing policies. Discussions about the role it should play in tackling climate change have taken place, but they tend to limit it to a role of assisting existing markets, not coordinating with fiscal policies to deliver investments in an energy transition.vii viii
This is the context from which the present funding proposal has emerged, exploring the potential of fiscal and monetary policies to achieve an energy transition in Portugal in a timely manner. Thus allowing directing the necessary funds to elaborate the decarbonization of the economy, while the destruction of jobs by the present economic crisis is counterbalanced by the new jobs needed to combat the climate crisis.
3 — Funding Vectors
I) Multiannual Financial Framework
The European Union’s Multiannual Financial Framework for the period covering the years 2021-2027 will have a total of €1,074 billion for the European Union as a whole. Of this, €29.8 billion will be directed to Portugal, for a total of €4.3 billion per year.ix
At the European level, this amount will be allocated by headings, with €356.4 billion going to “Natural Resources and the Environment”. There are still headings with significant values such as “Cohesion, Resilience and Values” and “Single Market, Innovation and Digital,” of which it is expected that part will also be allocated to the fight against climate change.
Thus, as a conservative assumption for this funding proposal for the implementation of Climate Jobs, the mentioned figure of €356.4 billion will be used as a reference, which corresponds to 35.1% of the total. Therefore, extrapolating for the Portuguese case, the Multiannual Financial Framework could provide €1,497 million per year to the Climate Jobs Campaign in Portugal.
Since this Multiannual Financial Framework only covers the period up to 2027, it is also assumed that in the remaining years in which the energy transition will be operated, the same budget allocation may be provided.
II) European Commission’s Stimulus Plan
The recent stimulus plan launched by the European Commission — Next Generation EU — includes subsidies and loans to be distributed by member states, totalling €750 billion to be spent by 2026.x
Of these, €15.3 billion in grants and €15.7 billion in loans are earmarked for Portugal.xi The preliminary version of the Recovery and Resilience Plan published on 15 October allocates The amount earmarked for climate transition totals €2.9 billion, distributed in tranches of Sustainable Mobility, Decarbonisation and Bioeconomy and Energy Efficiency and Renewables.
In light of this, the Climate Jobs campaign could use this €2.9 billion to implement an energy transition. Added to this is the unallocated €1.7 billion from the grant funds. This gives a total of €4.6 billion to be spent over six years, corresponding to €767 million annually.
This amount can only be spent in the next 6 years, but given the severity of the economic crisis that deepens globally, it will be expected and vital that new economic stimuli arise at the European level. Additionally, meeting climate targets requires new and ambitious plans for funds at the European level will certainly be needed to bring about the energy transition. With these two factors in mind, it is assumed with a high degree of confidence that this figure can be extended over the full duration of the energy transition plan.
III) Combating Tax Evasion
Contemporary societies are marked by high levels of tax evasion, and the recent report by the Tax Justice Network estimated the values of this tax evasion.xii In the case of Portugal, the total value of this evasion is estimated at €870 million per year. Thus, an effective fight against tax evasion is recommended, using the amount obtained to fund Climate Jobs.
To increase its effectiveness, this fight against tax evasion should be articulated within the European Union, given the common rules of this political space.
IV) Removing Tax Exemptions
The fossil fuel sector is highly subsidised, often through tax exemptions. The report by Investigate Europe — a multinational team of European journalists — has spelt out the amounts at stake.xiii €137 billion is allocated annually by 30 European states, with Portugal allocating almost €900 million.
In Portugal, adding together several items such as tax exemptions for air transport, electricity generation through fossil gas, dredging operations and suppressing the free emission allowances that are allocated by the European Commission, gives a total of €703 million per year.
However, conducting an energy transition will imply fossil fuel emitting activities undergoing a reduction, reaching virtually zero when the energy transition plan is complete. Thus, a linear reduction in emissions and the corresponding amount in taxes collected is assumed, which is reflected in a multiplier against the base amount. That is, assuming 10 years to complete the energy transition linearly — each year the emissions reduce by 10% based on the initial value — the revenue derived from the removal of these exemptions should be 90% in the first year, 80% in the second year, etc.
This gives us a weighting of the total value at 50%. On average, this removal of tax exemptions should fund the energy transition by €352 million per year.
V) Savings in Public-Private Partnerships
For several years, it has been an incontestable fact that the Portuguese state has spent an excessive amount of money on public-private partnerships have been, despite the lack of results to come from these partnerships. Calls to renegotiate them have gained renewed impetus with the outbreak of the current economic crisis.
Based on the assets underlying public-private partnerships, the state is overpaying by an estimated €1,200 million per year.xiv Therefore, renegotiating these would be crucial to put this budgetary slack at the service of an energy transition.
VI) New Personal Income Tax Bracket Above €100,000
In the most highly-developed countries, the tax rates on the highest incomes are at low levels relative to the values applied in the decades following the Second World War. Profound social and economic changes took place during these decades, changes which in many ways resemble those needed to stop the climate crisis. Some countries applied values of over 90% tax during this period and continued to function successfully.xv
The current economic crisis and the climate crisis give us reasons to rethink the rates in force in Portugal. This proposal, therefore, includes the creation of a new income tax bracket. Thus, for incomes above €100,000 per year there should be a new bracket with a single marginal rate of 75%. Currently, the households that would fall into this bracket are subject to a marginal rate of 44.2%, assuming they are self-employed without dependents. This assumption minimises the estimated value of the revenue raised through the new tax bracket.
Data from pordata.pt has been used to estimate the tax revenue from this new IRS bracket.xvi The most recent available data, from 2018, indicate 44,914 households with incomes between €100,000 and €250,000 per year, and 3,863 with incomes above €250,000.
Given that the information is obfuscated into ranges, conventional methods are used to estimate the averages that allow us to estimate the amount of tax. The midpoint is used for the €100,000-€250,000 bracket, resulting in an estimated average income of €175,000. The Pareto estimator is used for the interval starting at €250,000 and upwards bracket, resulting in an average value of €391,442.xvii
Assuming that the value of these fortunes remains constant, the revenue derived from including this new personal income tax bracket is estimated at €1.384 million per year.
VII) Implementing Inheritance Tax
Another type of tax which was prevalent during the decades following the Second World War was inheritance tax. This was even applied in Portugal, but abolished in 2003.
However, Spain continues to apply inheritance tax, thus offering us a close example of how it could be reimplemented in Portugal. There it operates in several scales, reaching rates of 34% in inheritances from €797,555.xviii There are also several exceptions, such as heirs under 21 years of age benefiting from exemptions.
Given the social proximity between Spain and Portugal, a weighting based on the size of the two economies is used to estimate the value that Portugal could obtain with this type of tax. Given the greater income inequalities in Portugal compared to the neighbouring country, we can consider this estimate of a progressive tax as conservative. The average revenue generated in the last five years for the Spanish State was €2.7 billion.xix Therefore, taking into account that in the same period the Portuguese economy accounted for 18.8% of the Spanish economy, the estimated revenue is €503 million per year.
VIII) Monetary Policy
The limitations to intervention by central banks in the most-highly developed countries have been challenged over recent years, especially during 2020 in light of the present economic crisis.
Calls for a monetary policy that prioritises the fight against climate change have been gaining traction recently. For example, the president of the institution herself has already stated her willingness to give the ECB a more active role in combating climate change.xx So far, the initiatives have been timid, but the concrete situation calls for greater initiative in combating climate change.xxi
The ECB’s more active role has been felt in the economy, averting, for now, more damaging economic consequences. This more active role is reflected in the expansion of the balance sheet of this institution, which has been growing over recent years, and more markedly in 2020, totalling an increase of around €2.5 trillion over the year, especially from March onwards.
Securities purchases on the market were particularly noteworthy, to the amount of €1.85 trillion.xxii Additionally, we may also highlight the medium-term emergency funding programme.xxiii
Given the constraints faced by countless companies and households in making loan payments, this intervention was crucial to ward off the spectre of a wave of bankruptcies. Thus, the proposal is to use this recent intervention as a benchmark for what the ECB’s role in eurozone funding should be, this time to ward off the spectre of climate chaos.
Taking €2.5 billion as a reference as an approximation of the increase in the ECB balance sheet, and weighting the value to the size of the Portuguese economy in the eurozone in terms of GDP (1.79%), gives us a result of €44 billion.
Thus, the funding proposal is to use 7.5% of this value per year, €3,351 million, to fund at zero cost the Portuguese state to implement decarbonisation plans.
4 – Summary
The proposals explored above estimate that funds of €9,923 million per year will be obtained, thus allowing to drive the energy transition in Portugal in the next 10 years.
These proposals would not only address the climate crisis, but would also drive economic recovery, averting the spectre of mass unemployment in face of the present economic crisis.
The amounts in question are distribuited in the following areas:
I) Multiannual Financial Framework: €1,497 million
II) European Commission Stimulus Plan: €767 million
III) Fight against tax evasion: €870 million
IV) Abolition of Tax Exemptions: €352 million
V) Savings in Public-Private Partnerships: €1,200 million
VI) New Personal Income Tax bracket above €100,000: €1.384 million
VII) Inheritance tax application: €503 million
VIII) Monetary Policy: €3,351 million
João Reis is a funding researcher, specialising in option pricing and credit risk.