Energy Products Tax Review

A package of Commission proposals to update the EU's energy products taxation scheme could have implications for fuel prices, electricity generation and households.

The Commission proposes taking into account both CO2 emissions and the energy content of each energy product.

It also proposes taxing certain sectors that currently fall outside the EU Emissions Trading Scheme (ETS), the largest international scheme for the trading of greenhouse gas emission allowances.

The revision of the Energy Products Taxation Directive represents an important element in the “Europe 2020 Strategy” as it would contribute to sustainable growth and the promotion of a more resource-efficient, greener and more competitive economy.

The package is composed of a Commission proposal revising the Energy Products Taxation Directive and a Communication on smarter energy taxation for the EU.

The revised Directive is expected to enter into force in 2013, and Member States would have a 10-year period to adapt to the new rules.

The need for change

Under current rules, minimum taxation rates for energy products are mainly based on volume and are set according to historical rates in Member States. According to the Commission, this creates unfair competition between fuel sources and creates tax benefits for certain types of fuels over others. Furthermore, the energy products taxation Directive from 2003 is no longer up to date regarding the climate action and energy targets set by the Commission for the next decade.

The purpose of this proposal is therefore to establish consistent treatment of energy sources covered by the Directive.  In order to achieve this, the proposed new rules aim to promote energy efficiency, the consumption of more environmentally-friendly products and to avoid competitive distortion within the internal market. In addition, the Commission aims to update the scope of the energy products taxation Directive to make it compatible with the EU ETS, without creating overlaps between the two instruments.

Approach

Under the revised rules the existing energy taxes are split into two components, which taken together determine the overall rate at which a product is taxed:

(1) a single minimum rate for CO2 emissions for all sectors not covered by EU ETS (namely households, transport, agriculture and small industries), fixed at €20 per tonne of CO2 (CO2-related taxation) and (2) minimum tax rates based on the actual energy that a product generates measured in Gigajoules (GJ) (‘energy content related taxation’).

The ‘CO2 related taxation’ is based on the reference CO2 emission factors set out in the Commission Decision on reporting of greenhouse gas emissions. The minimum tax rate of the ‘energy content related taxation’ is fixed at €9.6/GJ for motor fuels and €0.15/GJ for heating fuels and applies to all fuels used for transport and heating.

By setting minimum rates, rather than proposing a full harmonisation of energy taxes, the proposed rules aim to leave discretion to Member States as regards setting their own rates above the minimum EU levels. Accordingly, Member States may decide to only raise CO2-related taxation, only increase energy content-related taxation or raise both elements of the taxation.

Scope

Energy content-related taxation applies to all fuel used for transport and heating. Non-fuel related uses of energy products will remain outside the scope of the Directive, which is currently the case. As mentioned above, CO2-related taxation will complement the EU ETS by covering the sectors that remain outside the scheme. Biofuels are exempt from the CO2-related taxation to reflect their low level of CO2 emissions.

Motor Fuels

As regards motor fuels, there are important differences in the rates applied in the various Member States. Accordingly, the proposal aims to end this current distortive tax treatment by applying neutral taxation to petrol and diesel as well as other to motor fuels after the transitional period. For instance, diesel is currently taxed at a lower rate per litre than petrol in all Member States, except for the UK, in spite of its higher energy and CO2 content per volume.

Alternative Motor Fuels

In the current framework Member States which promote the use of liquefied petroleum gas (LPG) and compressed natural gas (CNG) often apply low levels of taxation to these products, leading to a more beneficial treatment of these alternative motor fuels.

However, the proposal foresees the same tax rates per energy and CO2 content at the end of the transitional period to be applied to all motor fuels, including LPG and CNG. The proposal allows for a longer transitional period for the alignment of these tax rates. Accordingly, Member States may continue to award beneficial treatment to LPG and CNG for 12 years.

Biofuels

Biofuels were traditionally taxed based on their volume, rather than their energy content, which meant they carried a heavier tax burden compared to other competing fuels. The Commission intends to address this.

Accordingly, under the revised rules biofuels would be taxed on the basis of their own energy content, which is generally lower than the content of the fuel they are intended to replace. Biofuels are also exempt from CO2-related taxation to reflect their better performance as regards CO2 emissions.

Heating Fuels

The Commission also intends to remove the current distortive treatment of heating fuels by applying the same level of tax per t/CO2 as well as GJ. This will lead to an increase for instance of the current very low taxes on coal, the product with the highest CO2 content. Since all businesses covered by the ETS will be automatically exempted from the CO2-related taxation element, the new rules would establish a level playing field between installations falling inside and outside the ETS.

Electricity

The proposal does not change the treatment of electricity since the energy content-related taxation will continue being levied at the point of consumption and the minimum rate will not change. Electricity generation is covered by the EU ETS and accordingly is in principle exempted from CO2-related taxation. Nevertheless, the CO2 element of the tax will cover small electricity generationstallations not covered by ETS because of their size.

Households

The impact of the revised rules on households as regards CO2-related taxation would depend on how Member States decide to recycle the revenue from this tax. Accordingly, they could for instance decide to use the revenues to compensate low-income households with lump sum payments.

In addition, the proposal still allows Member States to opt for a reduced rate for energy products used in domestic heating. Under the current rules this reduced rate is possible only for natural gas, coal and electricity, whereas under the revised rules this also applies to heating fuels for domestic purposes, including gas oil and coal.

Specific Sectors

As mentioned above, the Commission proposal distinguishes between sectors covered by ETS, where a carbon price already applies, and sectors falling outside the ETS which will be subject to CO2-related taxation. However, specific rules are foreseen for certain sectors with a high risk of carbon leakage. Accordingly, industries emitting greenhouse gas benefit from a tax credit based on the evolution of their consumption for the CO2 element of the tax.

As regards agriculture, the proposed rules will continue reflecting the specificities of this sector since full exemptions from the ‘energy content related taxation’ remain possible but will now depend on environmental and energy efficiency objectives.

Next Steps

The proposal will be sent to the European Parliament for a non-binding opinion and to the Council for adoption by unanimity. The proposed increase in tax rates is expected to receive opposition by some Member States, as for instance the UK which has already made clear that it does not approve the revised rules proposed by the Commission. If agreement is found by the institutions on the Directive it would enter into force in 2013 and work in parallel with the third phase of the EU ETS.