Executive summary

• Roughly two thirds of the European Union’s budget is financed out of member

states' national tax revenues. These resources, based on gross national incomes, are

transparent, fair and in line with the principle of subsidiarity but they lead to political

debates that emphasise the cost of EU spending rather than the benefits, and add to the

perception of the EU budget in terms of net balances, rather than value added.

• The financing of the EU budget must be reassessed in the light of the July 2020

decision to launch the Next Generation EU programme. Budget resources could include

a plastics charge, a carbon border adjustment mechanism, a digital tax, revenues from

emissions trading and a financial transactions tax. We evaluate these options against

four criteria: whether the origin of the revenue can be assigned to a particular member

state; whether the revenue can be raised in isolation or requires pan-European tax

coordination; whether the new resource can help reduce tax distortions in the EU; and

whether the resource is related to EU policies.

• Revenues from emissions allowances fit these criteria best. Carbon emissions do

not primarily cause damage only where they occur. Taking the EU cap on emissions as a

given, additional emissions in a particular member state should be regarded as a negative

externality on other member states. Emission reduction objectives are set at EU level.

Whoever auctions off an allowance, wherever the corresponding emission occurs in the

EU, and wherever the resulting good or service is consumed, the impact on common

policy outcomes is the same. In this regard, proceeds from the sale of emissions trading

system allowances are not that different from customs duties.