6 November 2023

Carbon Taxes and Renewable Energy Certificates (RECs) in EU

Explore Europe’s green shift with carbon taxes and RECs. These EU-regulated tools drive clean energy adoption, impacting 20 member states by October 2023. Discover their role in the European Green Deal and Circular Economy Action Plan for a greener future.

Carbon taxes and renewable green certificates (RECs) are two policy instruments that are used to promote the transition to a low-carbon economy in Europe. The EU regulates both instruments at the EU level, but member states have some flexibility in their implementation, which creates a dynamic landscape for environmental change.

What are Carbon Taxes in Europe  ?

A carbon tax places a tax on the carbon content of fossil fuels. Its design aims to raise the cost of fossil fuels, thus motivating consumers and businesses to transition to cleaner alternatives.

The EU has a minimum carbon tax rate of around €30 per tonne of CO2. However, Member States can set their own carbon tax rates above this minimum. As of October, 2023, 20 EU member states have carbon taxes in place.

How do Carbon Taxes Work ?

Carbon taxes work by increasing the cost of fossil fuels, effectively incentivizing consumers and businesses to make the shift towards cleaner alternatives like renewable energy or energy efficiency measures. These taxes are specifically imposed on the carbon content found within fossil fuels, aiming to internalize the environmental costs linked to their combustion.

By placing a financial burden on fossil fuels, carbon taxes encourage both individuals and businesses to actively explore and adopt more environmentally friendly and sustainable options.

EU Emissions Trading System (EU ETS)

The European Union Emissions Trading System (EU ETS) stands as the largest carbon market globally, encompassing more than 11,000 power plants and industrial facilities within the European Union.

Companies in the EU ETS must hold emission allowances for every metric ton of CO2 they release. The market dynamics influence the prices of these tradable commodities within the EU ETS marketplace.

The EU ETS has proven effective in curbing greenhouse gas emissions within the power and industrial sectors. Over its initial decade of operation, the EU ETS successfully reduced emissions by a remarkable 1.8 billion metric tons of CO2.

What are Renewable Energy Certificates (RECs), in Europe ?

A Renewable Energy Certification (REC) is a tradable certificate that represents 1 MWh of renewable electricity generation. RECs can be bought and sold separately from the electricity itself. This allows consumers and businesses to support renewable energy development, even if they are not able to purchase renewable electricity directly. 

The EU has a number of regulations in place to promote the development of REC markets. For example, the Renewable Energy Directive requires Member States to ensure that a certain percentage of their electricity consumption comes from renewable sources. RECs are used to meet this requirement.

The revenue from carbon taxes can support various purposes, including reducing other taxes, investing in clean energy technologies, or assisting low-income households with living costs.

Relationship between Carbon Taxes and RECs 

Carbon taxes and RECs work together to encourage a shift to a low-carbon economy. Carbon taxes help to reduce greenhouse gas emissions from fossil fuel to consumption, while RECs boost renewable energy. 

For instance, a government could use carbon tax revenue to buy RECs, reducing greenhouse gas emissions and backing renewable energy simultaneously.

Connecting Carbon Taxes and RECs to Europe’s Green Ambitions

The European Green Deal is a set of policy initiatives that aim to make Europe climate neutral by 2050. The circular economy action plan consists of policy initiatives that aim to transition Europe to a circular economy, where resources are kept in use for as long as possible, and waste is minimized.
Both carbon taxes and RECs play a vital role in the EU Green Deal and the Circular Economy Action Plan. Carbon taxes help to reduce greenhouse gas emissions from fossil fuel consumption. While RECs help to promote the development of renewable energy and to reduce our reliance on fossil fuels. 


The following statistics show the progress that Europe has made in reducing greenhouse gas emissions and increasing renewable energy generation: 

To Sum Up

Carbon taxes and Renewable Energy Certificates (RECs) stand as pivotal policy tools employed to facilitate the shift towards a low-carbon economy in Europe. These instruments are subject to regulation at the European Union (EU) level, leaving member states a degree of flexibility in their implementation.

The combination of carbon taxes and RECs can work in synergy to reduce greenhouse gas emissions and stimulate the growth of renewable energy sources. Furthermore, the European Union Emissions Trading System (EU ETS) serves as another crucial policy mechanism utilized to decrease greenhouse gas emissions in the power and industrial sectors.