“We are continuing our contacts with the European Commission to examine how similar reforms have been handled in other member states, and we will act accordingly,” Anthoula Savvidi, Director of the Recovery and Resilience Directorate at the Directorate-General for Growth, tells Politis.
Cyprus could lose €23 million in funding from the European Recovery and Resilience Facility as a result of the decision not to impose green taxation on fuels. President Christodoulides announced that the measure would not be implemented, even though it forms part of the National Recovery and Resilience Plan and would have increased fuel prices by around 9 cents per litre at a time of already elevated energy costs. However, in two years the new emissions trading system will be introduced, covering transport as well, and is expected to lead to a significant rise in fuel prices.
The total disbursements linked to the three green taxes included in the Recovery and Resilience Plan, namely the green water levy, the waste charge and the carbon tax on transport fuels, amount to €46 million.
So far, the water tax has been imposed through a decree that has already been issued, while the bill on sanitary waste taxation was recently submitted to parliament.
Negotiation with the EU
As Anthoula Savvidi, Director of the Recovery and Resilience Directorate at the Directorate-General for Growth, tells Politis, the introduction of a carbon tax on transport fuels is one of the three pillars of the green tax reform, as it targets the most polluting sectors of the economy and was expected to make the most significant contribution to reducing emissions.
More specifically, she notes, it was expected to prevent around 8 kilotonnes of greenhouse gas emissions by the end of 2026, on the assumption that implementation would have started in mid-2025.
However, she points out that, recognising the long-standing deficiencies in public transport infrastructure and the high cost of energy, the government had already successfully negotiated with the European Commission in relation to the carbon tax on the following points:
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Abolition of the tax upon the launch of the Emissions Trading System 2 (ETS2), given that ETS2 is due to enter into force across Europe in 2028, bringing a significant increase in transport fuel prices, preliminarily estimated at around 18 to 20 cents per litre gradually by 2030.
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Exemption of production fuels from the carbon tax, even though this had originally been proposed in an independent study funded by the European Commission.
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A lower carbon tax rate than the original proposal of 6 cents per litre for 2025, reducing it to 3 cents per litre for that year. For 2026, instead of the original proposal of 8 cents per litre, the agreed rate was 6 cents per litre in the first half of 2026 and 9 cents per litre from the second half of 2026 until the implementation of ETS2.
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Postponement of the tax, which had initially been due to take effect in 2023, and transfer of the relevant milestone to the sixth instalment of the Recovery and Resilience Plan grant, submitted to the Commission in July 2025.
“The government, taking into account the situation regarding energy prices and the positions of political parties, decided not to proceed with this taxation. As a result, the payment request for the sixth grant instalment was submitted so that we could receive the amount corresponding to the other milestones in that instalment which had been achieved, without the full package of green legislation having been passed,” she notes.
According to Savvidi, because the green tax reform, which includes the carbon tax, constitutes a significant Country-Specific Recommendation for Cyprus under the European Semester process, the European Commission has so far not accepted the removal of that milestone. As a result, she says, “the Commission informed us by a recent letter of a partial suspension of an amount corresponding to €23 million for the carbon tax, and the Republic of Cyprus has been given six months, until 31 August 2026, to take action.”
“It is important to stress that the European Commission, by accepting the above changes, has already shown considerable flexibility regarding the achievement of this specific milestone. Given the recent developments concerning fuel prices, we are continuing our contacts with the European Commission to see how similar reforms in other member states have been handled, and we will act accordingly,” she adds.
Party positions
“The government should long ago have withdrawn the green taxes from the Recovery and Resilience Fund, but it insisted dogmatically on the commitments undertaken by the previous administration of Nicos Anastasiades,” AKEL economy chief Charis Polykarpou tells Politis.
“It could in fact have done so on two occasions when the Cypriot programme was modified,” he says, adding that “it is the government’s own failure to negotiate effectively that has brought Cyprus to the point of potentially losing this money.”
“We have long pointed out that the imposition of these taxes would not have significant results for the green transition, since important infrastructure has not moved forward, while at the same time the social cost of applying the measure would have been far greater than the benefit from the revenue,” he stresses.
DISY MP and former finance minister Harris Georgiades told Politis that “at this particular moment it is entirely understandable not to proceed with energy taxation because of the sharp rise in prices caused by geopolitical developments.” However, he adds, “we want to be informed by the government whether there are understandings in place, or whether it is examining alternative scenarios, so that the correct decision not to impose the taxes does not result in a loss of revenue from the recovery fund.”
What economists say
“The Cypriot government’s decision not to proceed with the imposition of green taxation on fuels falls within a broader framework of political and social pressures, mainly linked to the increased cost of living, especially in relation to energy because of the war in Iran,” economist Tasos Iasemidis tells Politis.
“At a time when households and businesses are already facing significant burdens from inflation and energy costs, this choice is an attempt to avoid further economic pressure. It is a decision with short-term benefits, as it limits the immediate negative consequences for society,” he comments.
Iasemidis stresses that European funds are a critical tool for carrying out reforms and investments. “These funds are not simply financial support. They are linked to specific commitments that Cyprus has undertaken under the Recovery and Resilience Plan. Failure to implement the agreed measures, such as green taxation, could affect not only this specific disbursement but also the country’s overall credibility vis-à-vis the European institutions. However, I believe, also based on statements by European Commissioners who are promoting measures to ease energy costs, that this could be justified temporarily,” he says.
The non-imposition of green taxation may offer temporary relief, he adds, but it brings back more strongly the need for more timely and strategic planning in future, so that similar dilemmas between social policy and European obligations can be avoided.
“The government’s decision not to impose green taxation is moving in the right direction. Unfortunately, however, it comes late, and I hope not without prior consultation with the EU,” economist Stelios Platis points out.
“The problem here is that the initial commitments, and the renewed commitments, appear to have been undertaken without sufficient negotiation, even though it was already clear that energy costs, due to poor handling, were already placing a heavy burden on society. It was right that the postponement was finally achieved, and I believe we could persuade the EU to accept it,” he says.
“I hope the correct steps have been taken so that we do not lose all the related funds, possibly through amendments and/or a postponement of implementation through better planning and within the framework of a long-term energy strategy.”