Environmental Tax Policy Review of Romania

Executive summary

Governments face complex trade-offs in designing environmentally related tax policies, balancing public revenue generation, energy affordability, energy security and limiting negative impacts on health and the environment. Environmentally related taxes can play a key role in addressing such objectives.

The Environmental Tax Policy Review of Romania supports Romania in developing reforms to its environmentally relevant tax framework related to GHG emissions and air pollution in the residential buildings and road transport sectors. This report proposes actionable reform options based on a stocktake of Romania’s environmentally related tax system, governance and legal framework and a review of tax policy principles and international best practice. The economic, environmental, and social impacts of selected tax reform scenarios are assessed via simulation tools.

Romania's experience offers lessons for countries pursuing environmentally relevant tax reforms. While its buildings and transport sectors have distinct structural features, Romania shares many of the core challenges faced across countries in improving environmental outcomes while balancing other policy objectives.

Residential buildings

The current tax treatment of heating fuels in Romania’s residential building sector creates uneven incentives for reducing emissions and improving air quality. A number of fuels used for residential heating, including coal, liquefied petroleum gas (LPG), natural gas and solid fuels, are currently not covered by excise taxes, limiting the role of energy taxation in supporting environmental objectives. While the new EU Emission Trading System ETS2 will strengthen carbon price signals from fuel combustion in buildings, the exclusion of biomass could encourage a shift toward fuels that are not necessarily cleaner from a local air pollution perspective. Higher energy prices can also raise affordability concerns particularly for low-income and energy vulnerable households and where cleaner heating alternatives are not readily available.

Against this backdrop, Romania could consider broadening the excise tax base for residential heating fuels to include currently exempt fuels, such as coal, LPG, natural gas and solid fuels, with rates based on their energy content. Including biomass could also help reduce the risk of fuel switching that worsens local air pollution. Such reform should be embedded in a broader policy package that supports vulnerable households, facilitates switching to lower-carbon energy sources, and improves buildings’ energy performance, helping keep GHG and air pollutant reduction targets within reach.

Addressing air pollution requires a comprehensive policy package, and an air pollution tax might not be suitable in the Romanian context. Simulation results suggest that a hypothetical national air pollution tax on particulate matter emissions across energy products for heating purposes could significantly reduce emissions while limiting substitution effects towards heating fuels that create more local air pollution. However, tax measures alone are unlikely to be sufficient for Romania to move closer to its national emission ceiling targets. They also risk imposing substantial short-term costs on consumers and raising significant concerns about administrative feasibility and implementation capacity. Alternative non-tax measures include a restriction on the use of highly polluting heating stoves in the most affected areas, alongside targeted support for vulnerable groups to replace them. Parallel investment in electrified heating, district heating, better data collection and greater public awareness, would also be important to achieve the required reductions in air pollution.

Finally, distributional concerns should be integrated into the design of energy tax reform. Simulation results suggest that energy price increases resulting from the ETS2, an excise tax reform and an air pollution tax in the building sector would disproportionately affect lower-income and rural households, highlighting the need for well-targeted compensation mechanisms and complementary policies that improve access to low-emission and energy-efficient alternatives. Support should be targeted, replacing broad measures such as price caps or untargeted subsidies. Where feasible, eligibility criteria should account for multiple factors, such as geographic location and specific household needs to improve precision and equity. Complementary structural measures, including investment in district heating and natural gas grids, can further expand low-emission alternatives to reduce the burden on vulnerable households.

Transport sector

Reform of energy and vehicle taxation could play a significant role in supporting the reduction of air pollution, GHG emissions and congestion in the road transport in Romania. Simulation results suggest that tax measures can help reduce emissions, but are unlikely to be enough on their own to meet long-term environmental objectives. Air pollution and congestion also vary across places, which means that national tax measures need to be supported by local and regulatory measures.

Progress has already been made with the introduction of the air pollution components in the annual motor vehicle tax for cars and in the kilometre-based tax for heavy-duty trucks in 2026. These components could be increased for the most emitting vehicles to support further air pollution reduction. Regarding climate change mitigation, the introduction of a carbon component through the EU ETS2 in 2028 could be coupled with an increase in diesel excise duties to better align energy taxation with environmental costs. Maintaining a time-limited tax advantage for battery electric vehicles may also be important to sustain the momentum of electrification in its early phase in as far as BEV remain relatively more expensive, but its revenue implications need to be monitored.

Tax reform should be accompanied by other measures to reduce air pollution, GHG emissions and congestion. Air pollution is often effectively tackled at the local level, for instance through the implementation of city-level low emission zones or congestion charges with an air emission parameter, but these may have adverse effects on lower-income households. Vehicle performance standards also play an important role. Even in absence of further reform, Euro emission standards are expected to help stabilise air pollution emissions, according to simulations.

The effects on energy affordability for households and public acceptance should be considered when designing tax reform. Simulation results show that higher-income households will be the most impacted by increases in energy taxation, as they tend to spend more as a share of their income, while households living in less densely populated areas may also be adversely affected because they tend to rely more on diesel vehicles. Gradual implementation of reform, clear communication on the expected cost for different vehicles (including subsidies) and transparency on the expected effects of the reform could help build public support. Targeted subsidies for the most vulnerable households would also be important for garnering support and alleviating some of the negative impacts.

Finally, tax reform carries significant revenue implications. Growing car ownership is expected to increase excise duties tax revenues, while revenues from the motor vehicle tax would rise only modestly without further reform. ETS2 revenues are potentially substantial and may be earmarked for climate action. Looking ahead, long-term revenue stability could be supported by increasing and broadening road use taxes across all vehicles.

Outlook

In the current context of geopolitical uncertainty and rising energy prices, ensuring energy security and affordability has become a priority for many countries. Well-designed environmentally related taxes, combined with carefully designed targeted support measures, remain an important part of the policy toolkit to advance environmental and fiscal objectives, while supporting short-term energy affordability and distributional concerns.

This report was finalised in November 2025 prior to recent energy price developments. Even though overall reform suggestions focus on long-term structural shifts, findings on support measures remain relevant for crisis responses policy design. Key lessons for crisis responses include the importance of targeting support to vulnerable households, while preserving price signals to maintain incentives for energy saving and efficiency and long-term behavioural change and investment.