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EU: Unique Window of opportunity for a New Energy Taxation Directive

Friends, do you know that the European Commission has issued proposals that, for the first time, attempt to regulate fuel taxation rates in EU member states? I was perplexed when I read that the EU wants to see motor and heating fuels taxed according to their energy content and CO2 emissions rather than by volume as is the case today.  Isn’t that wonderful? If the proposals are accepted, diesel will in future cost more than petrol, biofuels will become relatively cheaper and LPG and CNG (compressed natural gas) will become more expensive. From the perspective of climate policy and the internal market, the proposals make sense. The big question now is, will member states be willing to buy the idea? Can it become a climate change mitigation model for the world? These are questions we could ask each other during ISES 2011.

 

The Commission says the timing of its revised energy taxation directive is perfect. Member states are re-focusing their economic policies on sustainable growth as they exit from the crisis. They are also drawing up strategies to meet a European-wide 20% carbon reduction goal for 2020. In my previous blog, I informed us UK’s aggressive emission target for 2050. Europe seem to be taking the lead on industrial decarbonization and emissions reduction. The energy taxation proposals could be a good model that provides member states with an opportunity to raise taxes on climate-unfriendly fuels and shift taxes from labour to consumption.

The Commission’s goal is to have the proposals enter into force in 2013, when the third phase of the EU’s emission trading scheme (ETS) kicks in. The idea is that the revised taxation directive will complement the EU’s carbon trade scheme by introducing a first-ever price on carbon in sectors that have so far been exempt from carbon emission restraints, such as transport and agriculture. Moreover, Brussels has an internal market case for its plans: the Commission wants to put in place a common framework for CO2 taxation as member states such as Denmark, Finland, Ireland and Sweden have started to introduce their own schemes. In concrete terms, under the proposals the energy content tax of transport fuels will be gradually increased to reach €9.6/GJ by 2018, while that for heating fuels will be €0.15/GJ from 2013. The CO2 component will be the same for all fuels: €20 per tonne from 2013, to resemble the carbon price in the EU ETS. The electricity sector will continue to pay the energy content part at today’s rates. In practice, outside of the transport sector, the main fuel affected by the proposals will be coal for heating. The new way of calculating fuel taxes means a steep minimum rate increase for coal, which today is taxed the least, even though it causes the highest emissions. One other major consequence of the new formula for calculating fuel taxes is that it would enable biofuels to compete on a level playing field with fossil fuels. At present, biofuels are treated in the same way as diesel and petrol in EU legislation, i.e. based on volume. Under the proposed revision, their lower energy content would be recognized and they would be exempt from the CO2 element of the tax if they meet sustainability criteria set by the EU’s renewable energy directive.

 

This is what is now popularly called Brussels' energy taxation revolution!

By: Timothy On Sunday, 29 May 2011 Comment Comments( 112 ) Hits Views(1154)
Comments(112)
Comments It will not be accepted by EU member-states

Hi Innocent,

a quick thought on Diesel: Yes, it has a higher energy coefficient. At the same time however modern Diesel engines are disproportionately more efficient than comparable petrol alternatives. If you do the maths, that is unless I am wrong :P, you'll find that it makes sense to indirectly subsidize Diesel through lower taxes since it still saves CO2 output on the same mileage. Of course you could get into the discussion how higher taxes would have a general adverse effect on fuel consumption and would thus mitigate the effects of people switching from Diesel to petrol, but I think that is bordering on speculation. So in conclusion: I believe there is a strong case to be made in favor of subsidizing Diesel, it is the more efficient engine, and due to those subsidies fairly impressive progress has been made in this field.

Best

Salomon

Disclaimer: I am German, so I am biased in this regard

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