Enhancing policy coherence

a challenge in terms of implementing programmes. Over 2014-20, Portugal had a high absorption rate of structural funds allocated to environmental protection and resource efficiency, climate change adaptation and risk prevention. However, projects on improving energy efficiency, and developing clean urban transport infrastructure and railways, have been delayed partly due to their complexity.

In

Progress in inter-ministerial co-operation. Environmental issues are increasingly integrated into sectoral plans such as energy and tourism. Several inter-ministerial commissions support co-operation. However, the balance between environmental and economic objectives is not always clear in the agriculture, transport and tourism sectors. Strategic environmental assessment should be further used in sectoral plans. They are generally developed in line with good practices and national guidance. However, the lack of alternatives considered often hinders the identification of more sustainable development options. Effective use of EU funds is key to boost green investment. At around 2% of GDP, total public investment was among the lowest in the OECD in 2019 and 2020. The cohesion policy is the main source of financing, accounting for nearly 60% of Portugal’s public investment over 2014-20. With Next Generation EU funds, Portugal needs to manage significantly higher amounts over 2021-27. This is an opportunity to address environmental issues (Figure 3) but also

Figure 3. The Recovery and Resilience Plan promotes the green transition, Portugal's Recovery and Resilience Plan allocations

Assessing the environmental impact of investments. Portugal’s Recovery and Resilience Plan (RRP) aims to boost the economy with Next Generation EU funds over 2021-26 (Figure 3). Its investments and reforms are to be supported by grants and loans representing about 8% of 2020 GDP. Portugal devoted 38% of its RRP budget to the climate objectives. The RRP rightly focuses on improving energy efficiency and promoting sustainable mobility. It also includes investments to decarbonise industrial processes and boost the use and production of hydrogen, prevent and fight rural fires, and improve water-use efficiency. However, concerns have been raised on investment in road network extension, new dams in water-scarce areas and on limited support for biodiversity.

Pursuing the green tax reform. In 2014, Portugal introduced a green tax reform, including a carbon tax in sectors outside the EU Emissions Trading System (ETS). It also increased the CO2 component of the vehicle registration tax, revised the taxation of water and waste management, granted property tax breaks for forest management and introduced a tax on single-use lightweight plastic bags. Revenue from environmentally related taxes increased, mainly driven by rising consumption and tax rates on diesel, until the COVID-19 crisis reduced the purchase and use of cars (Figure 4). However, green taxes have not provided consistent incentives to curb energy and water use and divert waste from landfills. The Ministry of Finance and Ministry of Environment and Climate Action are evaluating the impact of the green tax reform.

Reviewing fuel and vehicle taxation, and road pricing. Fuel and vehicle taxation have contributed to the increase in diesel vehicles and the ageing of the fleet, with adverse effects on local air pollution. Since the mid-2010s, new car registrations have shifted to petrol and, in recent years, to electric and plug-in hybrid electric vehicles. However, these vehicles only make up 1.7% of the car fleet. While fuel taxes are effective to reduce carbon emissions, distance-based charges depending on vehicle emissions and the place of driving are the best option to address local air pollution. Portugal has an electronic toll system operating on the motorway network for all vehicle categories. Toll prices vary according to the distance travelled, the height and the number of axles of the vehicles but not their emissions.

Phasing out environmentally harmful support. Like other OECD countries, Portugal supports consumption of fossil fuels through tax expenditure; oil and gas attract the bulk of government support. The largest amounts include reduced tax rates for diesel fuel used by agricultural equipment and, since 2017, partial refund of diesel taxes to freight companies; tax exemptions on energy products used for electricity production or by industrial installations under the ETS or an energy-efficiency agreement. Since 2014, forgone revenue from tax relief has increased with consumption and taxes on diesel and natural gas. In 2018, Portugal started to phase out some exemptions, which helped the exit from coal. However, progress has stalled with recent measures to address rising prices that include a general reduction of the energy tax and the freeze of the carbon tax. Portugal also supports water-intensive crops in water-stressed areas and livestock-intensive farming through coupled support and market measures under the common agricultural policy.