The European Union has set itself a clear goal: to achieve climate neutrality by 2050 and to reduce net greenhouse gas emissions by 55 % by 2030 as part of the Fit-for-55 legislative package. This transition to a cleaner economy necessarily means a shift away from coal, oil and natural gas. While it is an ecological necessity, from the perspective of national budgets this change represents a seismic shift. How is Slovakia coping with this unprecedented fiscal pressure compared to the rest of the European Union?

Loss of traditional income: Slovakia is more vulnerable

Historically, excise duties on mineral oils, natural gas and coal have been a stable and significant source of revenue for all EU Member States. With the decline in fossil fuel consumption, particularly in the transport and energy sectors, governments will face structural fiscal shortfalls that need to be replaced by other sources.

Looking at the data, it is clear that Slovakia will face this outage somewhat more intensely than the average European country.. In 2022, revenues from excise taxes on fossil fuels in Slovakia amounted to 2.90 % of total government revenue. Compared to the European Union average, which is only 2.04 %, this is a noticeable difference. This share ranks Slovakia in 9th place among the most dependent countries in the EU. On the contrary, Nordic countries with low dependence, such as Denmark (1.26 %) or Sweden (1.32 %), have a better starting position in this regard to smoothly manage the tax gap.

Slovakia's hidden advantage: Rapid emission reductions and low subsidies

Despite the higher dependence of the state budget on "fossil" taxes, Slovakia has several strong cards in its hands that put it in a favorable light compared to the rest of the EU.

The first positive is the progress made in decarbonization so far. Between 2005 and 2023, Slovakia recorded an exceptionally high level of greenhouse gas emissions reductions of up to 38 %. This result far exceeds the average emission decline across the EU, which reached a level of around 24 % over the same period.

The second, fiscally key factor is subsidies. While many EU Member States still invest massively in fossil fuels from public sources, Slovakia spends only a fraction on these direct reliefs and supports. In 2022, fossil fuel subsidies in Slovakia amounted to only 0.43 % of total public spending, while the EU average was 1.55 %. The absence of a large package of these subsidies means that the Slovak budget will not have to go through such painful political cuts in these expenditures.

The third pillar is the structure of existing environmental taxes. Slovakia is already effectively and to a greater extent using broader environmental taxes aimed at pollution or extensive use of resources. In 2022, these taxes amounted to 6.06 % public revenue, which is clearly above the EU average, which was 4.35 %.

New sources of financing and stability according to macroeconomic models

If the EU and its Member States want to keep their public finances stable and prevent excessive government debt growth, falling fossil fuel taxes must be fully offset by new policies. Market mechanisms and carbon pricing are becoming the main instruments.

The European Emissions Trading System (ETS1) and its planned extension to buildings and road transport (ETS2), as well as the Carbon Border Compensation Mechanism (CBAM) targeting imports from third countries, will play a crucial role. Scientific simulations using the E3ME and GEM-E3 macroeconomic models show that climate transition can be achieved while maintaining a sustainable level of national debt.

While the E3ME model predicts overall economic growth for the EU (the green transition serves as a huge investment stimulus), thanks to which income tax and VAT collections will increase, allowing governments to redistribute direct lump-sum subsidies to vulnerable households. The more conservative GEM-E3 model, on the other hand, warns of the risk of a slight cooling of GDP growth, as low-carbon technologies crowd out other investments and production costs rise. Increased ETS revenues will therefore have to be used exclusively for earmarked green subsidies – for example, for building insulation or the purchase of electric cars, and governments may be required to slightly adjust other tax rates to maintain stability.

How will Slovakia pay for its green transformation?

Slovakia will continue to be extremely dependent on European funds to cover the large investment costs that the modernization of networks and industry will require. The country draws billions of euros mainly from instruments such as Cohesion Fund, Modernisation Fund and Just Transition Fund, also supported by the financial mechanisms of the European Investment Bank (EIB).

Domestically, revenues from environmental taxes go directly to the Environmental Fund and finance environmental initiatives, such as the „Greener Slovakia“ program. In order to attract strategic private capital to the transformation, Slovakia began gradually issuing so-called “green bonds” in 2023, with the support of the European Bank for Reconstruction and Development (EBRD). green bonds (green bonds), which are used to specifically finance sustainable projects.

The Slovak National Medium-Term Fiscal-Structural Plan clearly speaks of two critical investment areas for the coming years:

1. Construction of new renewable energy sources (RES): It is planned to create 122.4 MW of new capacity for electricity generation, with at least 120 MW expected to be connected through support schemes.
2. Modernization of distribution systems: Increasing grid capacity by 469 MW is an absolute prerequisite for removing bottlenecks in the grid, which will ultimately enable the flexible connection of additional solar and wind power plants to the energy mix.

The transition away from fossil fuels will certainly require careful management of public finances. However, thanks to its excellent historical record in reducing emissions and low share of fossil fuel subsidies, Slovakia is well placed to turn this historic fiscal challenge into long-term economic benefit, using EU funds. JRi&CO2AI 

Source:

Impacts of climate transition on public finances – Study on the macroeconomic impacts of climate transition