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Spain – EHS Candidate for Reform

Fuel tax reductions and partial refunds for agriculture

Spain introduced the fuel tax reduction for agriculture in 1995. The subsidy aims to support farmers by lowering production costs and increasing profitability. The reduced tax for diesel used in tractors and agricultural machinery is more than three times lower compared to the standard rate. A partial refund of the special tax on hydrocarbons for eligible taxpayers was introduced in 2016 to offset the increase in agricultural production costs due to rising oil prices. This subsidy was reformed in 2017 when the partial refund was reduced. The subsidies lower the price of energy products and the cost of production, which leads to more use of fuel and increased production levels.

© Maksym Kaharlytskyi / Unsplash

There are no official figures for the budget impact of this subsidy. Based on consumption data and tax reduction rate, the estimated foregone government revenue was EUR 530 million in 2020. If the subsidy were abolished, the fuel price for agriculture would increase by 25%, causing a decrease in consumption by 5%.

The environmental impacts caused by the subsidy are increased GHG emissions and air pollution, land and water use and loss of biodiversity. The abolishment of the subsidy would reduce GHG emissions by around 600 thousand tonnes per year. It would also lower the use of resources.   

Spain’s Agenda for Change talks about the need and intention to adapt the tax system. This includes new green taxation, which will refer to an in-depth study to adopt tax measures to support the low-carbon transition. The reduced tax rates and partial refunds will also undergo a review. One option to soften the financial blow of reforming the subsidy would be lump-sum payments to compensate farmers for additional tax payments. It would incentivise farmers to be more energy-efficient and would not lead to immediate income losses. The increased tax revenues could be used to foster energy efficiency investments for farmers. While this would be very efficient from an environmental point of view, small farmers could be left out as they might not be able to fund these investments even with considerable support.

More information on the fuel tax reductions and partial refunds for agriculture and other candidates for reform in Spain and other Member States can be found in the country case studies and factsheets compilation.