Proposal: Equal tax for all fuels

A proposal for a revision of the EU Energy Tax Directive, launched in April by the European Commission, has triggered strong reactions from some of the EU member states, including giants like the UK and Germany.

If the tax directive proposal is accepted you will pay the same tax on energy and CO2 no matter if you choose diesel or petrol for your Venice boat ride.

The fury is caused by a proposal to make it mandatory to split the national fuel taxes in two parts, one based on the energy content and one on the emitted fossil CO2, and oblige the member states to use the same tax factor (€/kg CO2 and €/MJ) on all fuels in both of the categories motor fuels and heating.

Though these may only sound like minor technical changes, necessary to make energy taxation within EU more coherent and in line with EUs climate and energy policies, the proposal touches upon some very controversial topics within the EU.

For CO2, the Commission proposes a minimum tax of €0.2 per kg (= €20/tonne) from 2013 (in 9 Eastern states from 2021), covering (almost) all fossil fuels used outside the Emission Trading Scheme (ETS). The level is intended to mimic the same emission costs within as well as outside ETS in order to avoid perverse incentives and make emission reduction efforts cost-effective. The minimum CO2 tax has been perceived by some members as an EU-wide carbon tax, which in turn has made Germany appeal against it, referring to the government coalition deal of 2009, which specifically rules out a European carbon tax. The UK government (with the highest fuel taxes in the Union) thinks the EU should not intervene in national tax structures and regards the proposal as a move towards a common EU tax policy.

The proposed "technical neutrality" would mean that member states would have to use the same tax factor for all fuels – whatever the level, the CO2 tax should be the same for all fossil fuels and the energy tax factor should be the same for the same fuel category (motor fuel or heating fuel). Since diesel has both a higher energy content and causes higher CO2 emissions per litre, an inevitable consequence of the proposal is that diesel would always be taxed some 8 per cent higher per litre than petrol. At present all EU countries but one tax petrol at a higher rate per litre than diesel, the UK being the exception with similar taxes per litre for both. The proposal is particularly sensitive since both the EU and many member states have in recent years encouraged a switch from petrol cars with higher CO2 emissions per km to diesel cars with lower emissions per km.

In general the proposal is a small but clear step in the right direction. Its main weakness is that it hardly touches on the most urgent problems, which are related to the transport sector, where EU regulation is of fundamental importance since fuel is frequently bought in one country and used in another. This is particularly true for aviation, shipping and heavy road traffic.

On aviation and shipping fuels, the present directive includes an outright tax ban for non-domestic or recreational use. Concerning heavy vehicles the proposed minimum tax for diesel is set at such a low level that it will preserve the present situation where a few "fuel tax havens" – Luxembourg being the most obvious example – by setting the diesel tax level as low as permitted by the directive can attract huge numbers of international trucks to come and fill their tanks with low-tax diesel in Luxembourg instead of in France or Germany, for instance, where diesel taxes are 40-50 per cent higher. As a consequence, diesel sales in Luxembourg are 7-8 times higher per person than in the neighbouring countries, and the fuel tax revenues are 4-5 times higher per person. The system effectively prevents neighbouring countries from using fuel taxes efficiently as part of their climate policies. Paradoxically it leads to a situation where the state of Luxembourg would lose tax revenues if it raised the diesel tax!

An interesting proposal is a new tax break until 2020 for electricity delivered to ships at berth. The preconditions for a strong directive are as weak as possible. Decisions on the directive are taken solely by the 27 governments in the Council and unanimity is required. This means "fuel tax havens" or governments generally hostile to taxes can effectively prevent progress, unfortunately at the same time making it more difficult for other member states to raise their taxes.

No progress is foreseen during the Polish presidency, but things may change when Denmark takes over the presidency from 1 January 2012.

Magnus Nilsson Transport & Environment

The energy tax directive

The present Energy Tax Directive was adopted in 2003. It includes minimum taxes for motor fuels, heating fuels and electricity. The directive allows member states to deviate from the minimum taxes for a number of user categories. Full exception is permitted for household heating, public transport, rail transport and biomass-based fuels. The directive prohibits the taxation of aviation and shipping fuels. The minimum taxes are set in litres, tons, gigajoules and kWh. The new proposal would not raise the minimum taxes very much (petrol minimum will not change, diesel minimum will rise from €330/1000 l to €394/1000 l), but would create a more coherent system where the minimums for all fuels are set based on CO2 emissions and energy content, full stop. A general minimum tax for fossil fuels of €20/ton would cover every use of fossil fuels except for household heating. The energy factor minimum will rise automatically in line with inflation, while the CO2 factor will be adjusted by Council decision to reflect the development of the price of emission allowances within the ETS.

The European Commission proposal can be found at: Further reading: Report: Fuelling oil demand. What happened to fuel taxation in Europe?, April 2011 Briefing: Transport fuels & the energy Tax directive (ETD), May 2011 Publication: GBE, EEB and T&E position paper on the Energy Tax Directive, June 2011 All three can be found at:

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