## sipea2025079 — “Policies to Achieve Spain’s Climate Objectives” (and Section 2)

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**Canonical URL:** [sipea2025079 — “Policies to Achieve Spain’s Climate Objectives” (and Section 2)](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025079.pdf)

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---

### Abstract / Key Message
- Spain aims for a further 30 percent cut in greenhouse gas (GhG) emissions vis-à-vis the 2023 level by 2030, requiring measures beyond current efforts.
- Emission intensity varies widely across Spanish firms, creating potential for reductions by incentivizing laggards to converge toward less-polluting peers.
- Relying mainly on public spending (subsidies or public investment) would be costly and, on its own, insufficient to meet the new target.
- Carbon pricing is identified as the most effective, cost-effective, and fiscally attractive option, particularly given Spain’s limited fiscal space.
- The ongoing EU-ETS expansion could be complemented by domestic actions to strengthen carbon pricing’s role.

### Introduction: Context and Targets
- Spain’s updated 2023-2030 National Energy and Climate Plan (NECP) raised Spain’s 2030 GhG-emission-reduction target:
  - from 49 to 55 percent vis-à-vis the 2005 level;
  - from 23 to 32 percent relative to the 1990 level.
- Spain’s emissions were only slightly below 1990 levels in 2023, while emissions in EU-27 were already 36 percent below 1990.
- Electricity generation has achieved the largest GhG reduction, driven by renewables reaching over 56 percent in 2024.
- Several other sectors (e.g., agriculture and waste management) have lagged behind.

### Firm-Level Emission Heterogeneity — Data and Scope
- Firm-level dataset: 3,209 listed firms in advanced economies, including 48 Spanish firms, over 2010-2023.
- Emissions data: annual self-reported CO2 equivalent (CO1eq) scope 1 and scope 2 from ICE Data Services.
- Financials: balance sheets and income statements from S&P Compustat Global.
- Excluded sectors: finance, insurance, real estate; public administration; railroad transportation and local and interurban passenger transit; pipelines except natural gas; electric, gas, and sanitary services.

### Firm-Level Emission Heterogeneity — Findings and Drivers
- Spain’s aggregate GhG emission intensity (emissions per unit of output) is below the European average and broadly in line with Germany, Italy and France.
- Within industries, Spanish firms’ emission intensities (emissions over revenue) are more heterogeneous than in France and Germany:
  - Spanish firms at the 90th percentile emit 8 times more per unit of revenue than firms at the 10th percentile;
  - comparable multiples are 6 in France and 5 in Germany and Italy.
- Emission-intensive firms tend to be:
  - less productive;
  - operating with older physical capital;
  - holding limited intangible capital;
  - exhibiting weaker management practices.

### Counterfactual Potential (Firm Convergence and Capital Upgrades)
- If lagging Spanish firms lowered their emission intensity to the 50th percentile of the distribution across Spanish, French, German, and Italian firms within their industry, economy-wide emissions could fall by approximately 22 percent (nearly 75 percent of the needed 30-percent reduction).
- If Spanish firms in the bottom 50 percent of the distribution of physical capital age reduced age to the 50th percentile (median age 7.4 years), economy-wide emissions could also fall by about 22 percent.
- These counterfactuals hold firms’ output constant and do not assess feasibility, policy instruments, or costs—considered in Section C.

### Economic and Fiscal Impact of Climate Mitigation Policies — Model Features
- A multi-sector heterogeneous-firm general equilibrium model calibrated to Spanish firm-level data.
- Firms choose inputs and investments that determine carbon emissions:
  - Short run: adjust variable inputs to reduce energy consumption.
  - Medium term: invest in research to improve energy efficiency and increase capital intensity.
  - Firms can upgrade to newer capital vintages that reduce energy use and emissions.

### Counterfactual Simulations (Policy Instruments Calibrated to Achieve a 15 percent GhG Reduction)
- Policy instruments compared: higher carbon prices vs. larger subsidies to newer capital vintages.
- To achieve a 15 percent reduction in GhG emissions:
  - Carbon price would need to increase by about US$ 64 per ton of CO2eq above baseline.
  - Capital subsidies would need to cover over 50 cents for every dollar a firm spends on upgrading capital.
- Fiscal and welfare implications (using a 4 percent time discount factor to compute net present value (NPV) of consumption):
  - Relying solely on capital subsidies implies a net present value loss in consumption of over 10 percent.
  - The net present value cost from higher carbon pricing is negligible under the model.
- For discount rates greater than 1.5 percent, the short-term fiscal cost of capital subsidies outweighs their long-term benefits in terms of increased output and productivity.
- Achieving very large emission cuts (e.g., Spain’s NECP 2030 target of over 30 percent relative to 2023) through capital subsidies alone is found to be unfeasible in the model, underscoring the importance of carbon pricing.

### Caveats and Limitations
- The analysis assumes a fixed current energy mix of the electricity grid and does not account for policies that would green the grid.
- The model excludes intermediate inputs and input-output linkages across sectors.
- The analysis does not explore competitiveness implications of mitigation policies.
- By ignoring revenue recycling, the analysis likely underestimates the economic benefits of carbon pricing relative to subsidies; carbon-pricing revenues can be recycled (e.g., via labor tax cuts) to reduce distortions, while subsidies typically require financing that increases distortions.

### Conclusion and Policy Implications
- Spain’s 2030 climate targets require new measures beyond current policy settings; a further 30 percent cut from 2023 levels by 2030 is ambitious.
- A substantial portion of the needed emission reductions could be achieved if lagging firms converge toward the technological and capital standards of top performers, including upgrading capital vintages.
- Carbon pricing emerges as the most cost-effective and fiscally attractive primary tool to achieve emissions reductions, while subsidies for capital upgrades can complement pricing but are fiscally costly and insufficient on their own.
- Domestic actions to strengthen carbon pricing should complement the ongoing EU-ETS expansion, with attention to design features (including revenue recycling) and to addressing potential competitiveness concerns through targeted measures.

### Green investments under the Recovery, Transformation and Resilience Plan
- The Recovery, Transformation and Resilience Plan had about 40 percent of the Next Generation EU (NGEU) funds devoted to green investments.
- Green investment areas highlighted:
  - Renovating the building stock to increase energy efficiency.
  - Making mobility and the transport sector more sustainable.
  - Increasing the share of renewables in the energy mix.
  - Addressing biodiversity challenges.
  - Enhancing water and waste management.
- The Recovery, Transformation and Resilience Plan is a roadmap of structural reforms and investments, established as a requirement to access funds—in the form of grants and loans—from the Recovery and Resilience Facility. This is a temporary financing instrument that lies at the core of Next Generation EU, a plan put in place in 2021 to support Europe’s recovery from the pandemic, making its economy greener, more digital and more resilient.

### Market Instruments to Incentivize Energy Savings: “White Certificates”
- In 2023 Spain introduced “white certificates”, instruments issued to companies and organizations that implement projects leading to verifiable energy savings.
- Trading mechanism:
  - Certificates can be traded on the market.
  - Companies required to meet certain energy-saving targets (e.g., gas and electricity marketing companies, wholesale petroleum product operators, and wholesale liquefied petroleum gas operators) may purchase certificates from those who have achieved required energy savings.

### Carbon Pricing and Meeting Spain’s 2030 Climate Targets (Section 2 Findings)
- Core finding:
  - Expanding the scope and level of carbon pricing is identified as the most cost-effective option to reduce GhG emissions, enabling more ambitious abatement targets at a lower economic and fiscal cost than other options.
- Contextual constraints:
  - Spain has limited fiscal space and the end of NGEU funding in 2026 increases the need for cost-effective measures.
  - The ongoing expansion of the EU-ETS will play a critical role, but:
    - The impact of carbon pricing in EU-ETS2 sectors might take time to fully materialize.
    - Free allowances under EU-ETS1 will be phased out only gradually over 2027-34.
  - The expansion of EU-ETS primarily involves broadening its scope to cover emissions from the maritime transport sector under EU-ETS1 and introducing a new ETS2 that will apply a carbon price to emissions from fuel combustion in buildings and road transport starting from 2027.
- Implication:
  - Complementary domestic actions are needed to meet Spain’s 2030 emission goal.

### Domestic Policy Options
- Potential measures identified:
  - Raising carbon taxation in the residential and road transport sectors.
  - Encouraging the adoption of a landfill tax by more autonomous communities to further discourage waste disposal.
  - Providing price-based incentives to optimize the use of fertilizers in agriculture.
  - Introducing feebates in the agriculture and livestock sector (noted example: recently done in Denmark), leveraging the advanced emissions monitoring system in livestock farms currently in place in Spain.
- Additional benefit:
  - Staff analysis suggests that mitigation actions, by inducing firms to upgrade their capital stock, could help increase productivity over time, contributing to keep the economic cost of carbon pricing low.

### Mitigating Distributional Impacts to Improve Political Acceptability
- Issue:
  - Carbon pricing, despite its low overall economic cost, can entail significant distributive impacts across industries and households that may hamper political and social acceptability.
- Recommended mitigation strategy:
  - Use some carbon pricing revenues to:
    - Compensate the most vulnerable.
    - Cut distortionary taxes on households and firms.
    - Allocate the remainder to reduce Spain’s fiscal deficits.
- EU-level precedent:
  - The Social Climate Plan—financially supported by the EU Social Climate Fund—will fund compensatory measures that mitigate the impact of carbon pricing on vulnerable households, micro-enterprises and transport users.
  - The approach of using revenues to compensate vulnerable groups could be emulated when expanding the scope and level of green taxation in Spain.

*Source: IMF Selected Issues Paper SIP/2025/079 — “Policies to Achieve Spain’s Climate Objectives” (completed May 16, 2025).*

### Section 1

### Policies to Achieve Spain’s Climate Objectives

### Abstract / Key Message
- Spain aims for a further 30 percent cut in greenhouse gas (GhG) emissions vis-à-vis the 2023 level by 2030, requiring measures beyond current efforts.
- Emission intensity varies widely across Spanish firms, creating potential for reductions by incentivizing laggards to converge toward less-polluting peers.
- Relying mainly on public spending (subsidies or public investment) would be costly and, on its own, insufficient to meet the new target.
- Carbon pricing is identified as the most effective, cost-effective, and fiscally attractive option, particularly given Spain’s limited fiscal space.
- The ongoing EU-ETS expansion could be complemented by domestic actions to strengthen carbon pricing’s role.

### Introduction: Context and Targets
- Spain’s updated 2023-2030 National Energy and Climate Plan (NECP) raised Spain’s 2030 GhG-emission-reduction target:
  - from 49 to 55 percent vis-à-vis the 2005 level;
  - from 23 to 32 percent relative to the 1990 level.
- Spain’s emissions were only slightly below 1990 levels in 2023, while emissions in EU-27 were already 36 percent below 1990.
- Electricity generation has achieved the largest GhG reduction, driven by renewables reaching over 56 percent in 2024.
- Several other sectors (e.g., agriculture and waste management) have lagged behind.

### Firm-Level Emission Heterogeneity
Data and scope
- Firm-level dataset: 3,209 listed firms in advanced economies, including 48 Spanish firms, over 2010-2023.
- Emissions data: annual self-reported CO2 equivalent (CO1eq) scope 1 and scope 2 from ICE Data Services.
- Financials: balance sheets and income statements from S&P Compustat Global.
- Excluded sectors: finance, insurance, real estate; public administration; railroad transportation and local and interurban passenger transit; pipelines except natural gas; electric, gas, and sanitary services.

Findings on heterogeneity and drivers
- Spain’s aggregate GhG emission intensity (emissions per unit of output) is below the European average and broadly in line with Germany, Italy and France.
- Within industries, Spanish firms’ emission intensities (emissions over revenue) are more heterogeneous than in France and Germany:
  - Spanish firms at the 90th percentile emit 8 times more per unit of revenue than firms at the 10th percentile;
  - comparable multiples are 6 in France and 5 in Germany and Italy.
- Emission-intensive firms tend to be:
  - less productive;
  - operating with older physical capital;
  - holding limited intangible capital;
  - exhibiting weaker management practices.

Counterfactual potential
- If lagging Spanish firms lowered their emission intensity to the 50th percentile of the distribution across Spanish, French, German, and Italian firms within their industry, economy-wide emissions could fall by approximately 22 percent (nearly 75 percent of the needed 30-percent reduction).
- If Spanish firms in the bottom 50 percent of the distribution of physical capital age reduced age to the 50th percentile (median age 7.4 years), economy-wide emissions could also fall by about 22 percent.
- These counterfactuals hold firms’ output constant and do not assess feasibility, policy instruments, or costs—considered in Section C.

### Economic and Fiscal Impact of Climate Mitigation Policies
Model features
- A multi-sector heterogeneous-firm general equilibrium model calibrated to Spanish firm-level data.
- Firms choose inputs and investments that determine carbon emissions:
  - Short run: adjust variable inputs to reduce energy consumption.
  - Medium term: invest in research to improve energy efficiency and increase capital intensity.
  - Firms can upgrade to newer capital vintages that reduce energy use and emissions.

Counterfactual simulations (policy instruments calibrated to achieve a 15 percent GhG reduction)
- Policy instruments compared: higher carbon prices vs. larger subsidies to newer capital vintages.
- To achieve a 15 percent reduction in GhG emissions:
  - Carbon price would need to increase by about US$ 64 per ton of CO2eq above baseline.
  - Capital subsidies would need to cover over 50 cents for every dollar a firm spends on upgrading capital.
- Fiscal and welfare implications (using a 4 percent time discount factor to compute net present value (NPV) of consumption):
  - Relying solely on capital subsidies implies a net present value loss in consumption of over 10 percent.
  - The net present value cost from higher carbon pricing is negligible under the model.
- For discount rates greater than 1.5 percent, the short-term fiscal cost of capital subsidies outweighs their long-term benefits in terms of increased output and productivity.
- Achieving very large emission cuts (e.g., Spain’s NECP 2030 target of over 30 percent relative to 2023) through capital subsidies alone is found to be unfeasible in the model, underscoring the importance of carbon pricing.

Caveats and limitations
- The analysis assumes a fixed current energy mix of the electricity grid and does not account for policies that would green the grid.
- The model excludes intermediate inputs and input-output linkages across sectors.
- The analysis does not explore competitiveness implications of mitigation policies.
- By ignoring revenue recycling, the analysis likely underestimates the economic benefits of carbon pricing relative to subsidies; carbon-pricing revenues can be recycled (e.g., via labor tax cuts) to reduce distortions, while subsidies typically require financing that increases distortions.

### Conclusion and Policy Implications
- Spain’s 2030 climate targets require new measures beyond current policy settings; a further 30 percent cut from 2023 levels by 2030 is ambitious.
- A substantial portion of the needed emission reductions could be achieved if lagging firms converge toward the technological and capital standards of top performers, including upgrading capital vintages.
- Carbon pricing emerges as the most cost-effective and fiscally attractive primary tool to achieve emissions reductions, while subsidies for capital upgrades can complement pricing but are fiscally costly and insufficient on their own.
- Domestic actions to strengthen carbon pricing should complement the ongoing EU-ETS expansion, with attention to design features (including revenue recycling) and to addressing potential competitiveness concerns through targeted measures.

*Source: IMF Selected Issues Paper SIP/2025/079 — “Policies to Achieve Spain’s Climate Objectives” (completed May 16, 2025).*

### Section 2

### sipea2025079 - Section 2

### Green investments under the Recovery, Transformation and Resilience Plan
- The Recovery, Transformation and Resilience Plan had about 40 percent of the Next Generation EU (NGEU) funds devoted to green investments.
- Green investment areas highlighted:
  - Renovating the building stock to increase energy efficiency.
  - Making mobility and the transport sector more sustainable.
  - Increasing the share of renewables in the energy mix.
  - Addressing biodiversity challenges.
  - Enhancing water and waste management.
- The Recovery, Transformation and Resilience Plan is a roadmap of structural reforms and investments, established as a requirement to access funds—in the form of grants and loans—from the Recovery and Resilience Facility. This is a temporary financing instrument that lies at the core of Next Generation EU, a plan put in place in 2021 to support Europe’s recovery from the pandemic, making its economy greener, more digital and more resilient.

### Market instruments to incentivize energy savings: "white certificates"
- In 2023 Spain introduced “white certificates”, instruments issued to companies and organizations that implement projects leading to verifiable energy savings.
- Trading mechanism:
  - Certificates can be traded on the market.
  - Companies required to meet certain energy-saving targets (e.g., gas and electricity marketing companies, wholesale petroleum product operators, and wholesale liquefied petroleum gas operators) may purchase certificates from those who have achieved required energy savings.

### Carbon pricing and meeting Spain’s 2030 climate targets
- Core finding:
  - Expanding the scope and level of carbon pricing is identified as the most cost-effective option to reduce GhG emissions, enabling more ambitious abatement targets at a lower economic and fiscal cost than other options.
- Contextual constraints:
  - Spain has limited fiscal space and the end of NGEU funding in 2026 increases the need for cost-effective measures.
  - The ongoing expansion of the EU-ETS will play a critical role, but:
    - The impact of carbon pricing in EU-ETS2 sectors might take time to fully materialize.
    - Free allowances under EU-ETS1 will be phased out only gradually over 2027-34.
  - The expansion of EU-ETS primarily involves broadening its scope to cover emissions from the maritime transport sector under EU-ETS1 and introducing a new ETS2 that will apply a carbon price to emissions from fuel combustion in buildings and road transport starting from 2027.
- Implication:
  - Complementary domestic actions are needed to meet Spain’s 2030 emission goal.

### Domestic policy options
- Potential measures identified:
  - Raising carbon taxation in the residential and road transport sectors.
  - Encouraging the adoption of a landfill tax by more autonomous communities to further discourage waste disposal.
  - Providing price-based incentives to optimize the use of fertilizers in agriculture.
  - Introducing feebates in the agriculture and livestock sector (noted example: recently done in Denmark), leveraging the advanced emissions monitoring system in livestock farms currently in place in Spain.
- Additional benefit:
  - Staff analysis suggests that mitigation actions, by inducing firms to upgrade their capital stock, could help increase productivity over time, contributing to keep the economic cost of carbon pricing low.

### Mitigating distributional impacts to improve political acceptability
- Issue:
  - Carbon pricing, despite its low overall economic cost, can entail significant distributive impacts across industries and households that may hamper political and social acceptability.
- Recommended mitigation strategy:
  - Use some carbon pricing revenues to:
    - Compensate the most vulnerable.
    - Cut distortionary taxes on households and firms.
    - Allocate the remainder to reduce Spain’s fiscal deficits.
- EU-level precedent:
  - The Social Climate Plan—financially supported by the EU Social Climate Fund—will fund compensatory measures that mitigate the impact of carbon pricing on vulnerable households, micro-enterprises and transport users.
  - The approach of using revenues to compensate vulnerable groups could be emulated when expanding the scope and level of green taxation in Spain.

*Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025079.pdf*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025079.pdf_