What is the green cent?

What is the green cent?

The green cent is the colloquial name given to the Special Hydrocarbons Tax applicable to petrol and diesel and, more relevant to the electricity sector, natural gas. 

This figure, approved by Special Tax Law 38/1992, was first amended by Law 15/2012 on tax measures for energy sustainability, and then by Royal Decree Law 15/2018 on urgent measures for the energy transition and consumer protection. 

In the manner in which it was in force since 2012, this tax provided the electricity sector with significant revenues from electricity generation using natural gas and from the end consumption of this fuel. For example, 560 million euros were earned through this in 2017 (according to the end of year forecast of the CNMC included in the report on the toll order proposal of 2018 ref. IPN/CNMC/045/17).

Electricity generation and the green cent

However, in late 2018, RD-Law 15/2018 changed the configuration of the green cent, introducing an exemption to “the production of electricity in power plants or the production of electricity or the co-generation of electricity and heat in combined power plants”. In other words, since the end of 2018 combined cycle power plants and natural gas co-generation plants do not have to pay this tax. 

The justification of the Royal Decree was that combined cycle power plants transfer this tax in their offers to the market and, therefore, the exemption “will eliminate the multiplying effect” on wholesale market prices, moderating its bullish evolution, which was one of the goals of the regulation. 

This exemption, however, does not include coal-powered plants, which continue to pay the special tax on this fuel. For 2019, the CNMC expects this special coal tax to contribute 280 million euros to the electricity system (according to the forecast by the CNMC included in the report on the toll order proposal of 2019, INF/DE/097/18). 

What is energy taxation so important?

The main goal of the taxes is to fund public expenditure and, in the case of special hydrocarbon and coal taxes, the costs of the electricity system. 

However, the tax can also be used to encourage or penalise the decisions of the players to guide them in one direction or the other. Therefore, energy taxation is considered a key aspect in energy transition, because it can contribute towards the progressive replacement of fossil fuels with renewable energies or electrification, to give two examples. 

Taxes can be used to internalise the environmental costs of the different energy vectors at their price, enabling players to observe the environmental impact generated by their decisions regarding consumption or production. 

This is known as following the principle of “who pollutes pays” that, together with those of non-discrimination or technology neutrality, should form the basis of energy taxation. 

Author: Viesgo Regulations Team