Alongside its Electrification Action Plan, the European Commission proposed that member states tax electricity no more heavily than gas. This paper assesses how cutting electricity taxes to that level, or to the EU minimum, affects bills, electrification incentives and public budgets. Only about a third of EU member states tax electricity more than gas, so the Commission’s proposed parity rule would only affect these countries. An in-depth analysis of seven member states shows that the effects of a cut vary widely. Electricity taxes account for around 0.5 to 14 percent of electricity prices for a typical family household in the sample, so a cut noticeably lowers bills only where that share is high. Relief goes mainly to households and smaller businesses that do not yet benefit from exemptions. It strengthens electrification incentives only where the electricity-to-gas price ratio is also high. For the public budget, revenue losses dominate at first, but electrification can improve the fiscal balance over time through lower exposure to fossil fuel price shocks and avoided climate damages. Targeted cuts can deliver electrification benefits at a lower fiscal cost than a general cut and are already possible, but legal reforms to simplify their use would be desirable.
Why did we write this article?
Electrification is a key strategy for reducing Europe’s exposure to volatile fossil fuel prices, raising competitiveness and efficiency and limiting climate damages. Lowering electricity prices relative to fossil fuel prices is critical for improving the economics of electrification investments. In line with this, the European Commission’s Electrification Action Plan targets electricity-to-gas price ratios of 2.5 for households and 2.0 for industry by 2030, accompanied by a legislative proposal requiring member states to tax electricity no more heavily than gas. We wanted to understand how cutting electricity taxes would affect bills, electrification incentives and public budgets.
What did we learn?
Electricity tax regimes differ greatly across the EU. The Commission’s proposal mandating parity between electricity and gas taxes would affect about a third of EU states, as the others already tax gas at least as heavily as electricity, or tax neither. In the seven countries we analyse in depth, electricity taxes make up between 0.5 and 14 percent of a typical household’s electricity price. Where that share is high, such as in France, Germany or Denmark (outside its temporary 2026–27 cut), a cut noticeably lowers bills. Because electricity-intensive industry already pays close to the EU minimum in most countries, relief goes mainly to households and to businesses that currently lack exemptions, especially in services.
The electrification benefit of a tax cut depends on national electricity-to-gas price ratios. Across the countries analysed, cutting electricity taxes to the EU minimum would lower this ratio by 0.1 to 0.9 points for households, and by up to 0.4 points for non-household consumers. For large industrial consumers, most of whom already benefit from exemptions, the reduction would be 0.1 points at most. Beyond its direct price effects, an electricity tax cut would send a clear pro-electrification signal: a climate-aligned taxation regime should not tax electricity more heavily than fossil fuels.
The key economic and fiscal benefits of electricity tax cuts materialise over time. In the short term, direct tax revenue losses outweigh additional revenues from increased electricity consumption and economic activity, and governments will have to decide which financing sources can compensate for this. In the medium to long term, as electrification increases, reduced exposure to fossil fuel price shocks, lower stabilisation spending and avoided climate damages can improve the overall fiscal balance. At the same time, every switch away from gas or oil erodes fossil fuel tax revenue.
