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Single Market Act – Energy Taxation

19 May 2011

Elaine Gallagher

As part of the Single Market Act, the European Commission has presented a proposal to overhaul outdated rules on the taxation of energy products in the EU.

Such taxes already exist in all Member States, and are harmonised to a certain degree at EU level by the 2003 Energy Taxation Directive, which set out common rules on what should be taxed and what exemptions should be allowed. Minimum rates, based mainly on the volume of energy consumed, were laid down for products used in heating, electricity and motor fuels. Above these minimum rates, Member States have remained free to set their own national rates as they see fit.

The core concern of the 2003 Directive was the removal of competitive distortions in the energy sector. The new rules maintain this focus and add two more central objectives.

The first is to contribute to growth and employment by shifting taxation from labour to consumption.

The second is to better address the EU’s increasingly ambitious climate change agenda by taking into account the CO2 emissions of energy products.

They also aim to better align energy taxes with the EU's emissions trading scheme (ETS) and to remove inconsistencies that have created unjustifiable tax benefits for certain types of fuel compared to others. For example, under the current rules, coal is the least taxed and ethanol is the most taxed fuel type. A Commission press release has more detail:

Renewables face particular discrimination under the current Energy Taxation Directive, because they are taxed at the same rate as the energy source they are intended to replace (e.g. biodiesel is taxed the same as diesel etc). As this rate is based on volume, rather than energy content, products with lower energy content such as renewables carry a heavier tax burden compared to the fuels they are competing with.

The Commission's plan would address this problem by linking energy tax to energy content rather than volume. Certain renewables would also be made exempt from the CO2 element of the tax, assuming they meet the sustainability criteria set by the EU’s renewable energy directive.

Yet another goal is to introduce a European carbon price to sectors not currently covered by the ETS, i.e. agriculture, transport, services and households, which together cover about 50% of European emissions. The Commission notes that while some Member States have begun to introduce carbon taxes at national level, different rates and interpretations are likely to lead to double taxation and high compliance costs for businesses operating cross-border. Europeanising carbon taxation should prevent a patchwork of national policies from creating obstacles and distortions in the Single Market and thereby assist in the shift to renewables.

It is difficult to estimate the climate impact of the Commission’s proposals as it will remain up to member states to set and implement taxation frameworks. A number of exemptions are also envisaged, including for such energy intensive activities as household heating and agriculture.

Difficulties are bound to arise during negotiations because taxation remains a national competence so any new rules must be accepted unanimously by member states, and a number of them will have substantial reservations about the proposals. These will relate to sovereignty (Ireland, the UK and others are instinctively suspicious about EU 'meddling' in their tax affairs), effects on industry (Germany, Italy and other car manufacturing countries will not want to see petrol prices rising by decree), and the cost of carbon pricing (many of the newer and poorer member states will be very reluctant to add to the cost of heating fuel because of a Brussels-led initiative against climate change, although their concerns may be partly allayed by exemptions on parts of the CO2 component of some fuel taxes until 2020).

If approved by the European Parliament and Council, a revised Directive would enter into force in 2013, though a decade-long transition period would give industry time to adapt to the new taxation structure. 

That remains a big 'if'. The Commission will recall that the 1992 energy taxation directive took five years to reach agreement and was only eventually revised in 2003. Nonetheless, everyone now recognises the need for an update and member states could yet seize this opportunity to generate public revenue, damp down energy demand and combat climate change simultaneously. 

Astrid Lulling is the MEP in the European Parliament's Economic and Monetary Affairs Committee with responsibility for this dossier.

Four other Parliamentary Committees (Budgets; Environment, Public Health and Food Safety; Industry, Research and Energy; and Transport and Tourism) will also deliver opinions on the text before it is debated in the ECON Committee and put to a vote in a plenary session of the European Parliament.


This content forms part of the E View project, which is part-funded by DG Communication of the European Parliament. 


As an independent forum, the Institute does not express any opinions of its own. The views expressed in the article are the sole responsibility of the author.

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