The effects of the Energy Taxation Directive (ETD - Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity) have been assessed by the European Commission in the 2020 Report of 14 October 2020 on the State of the Energy Union pursuant to Regulation (EU) 2018/1999 on Governance of the Energy Union and Climate Action (COM(2020) 950 final) as follows:
“The Energy Taxation Directive does not achieve anymore its primary objective related to the proper functioning of the internal market. Minimum tax rates have lost their effect and divergent national rates are applied in combination with a wide range of tax reliefs. These exemptions and reductions are, de facto, forms of fossil fuel subsidies, and not in line with the objectives of the European Green Deal. The revision of the Directive aims to overcome those shortcomings.”
Also in the Communication of 9 April 2019 (A more efficient and democratic decision making in EU energy and climate policy, COM(2019) 177 final), the European Commission reminds that current energy taxation framework is based on Article 113 TFEU (which provides for a special legislative procedure with unanimity in the Council) and that this framework is not adapted to the European Union’s ambition on energy and climate.
In particular, the said framework, while reflecting Member States’ taxation patterns, based largely on revenue raising needs, fails:
- to provide for policy coherence between the taxation framework and energy and climate policies and objectives;
- to integrate in a systemic manner the impact of fuel and electricity consumption on the achievement of the EU’s energy and climate objectives as well as the health and environmental objectives.
In that respect, the Commission proposed on different occasions the use of a tax on fossil fuels according to the carbon emissions associated with their use, however, Member States could not unanimously agree on the terms of these proposals.
The recent call by some Member States to make use of border carbon tax adjustments would also require unanimity.
Commission Communication of 17 September 2020 “Stepping up Europe’s 2030 climate ambition Investing in a climate-neutral future for the benefit of our people” (COM/2020/562 final) reads:
“Next to extending the use of emissions trading also the revision of Energy Taxation Directive could contribute to putting a price on carbon and reducing emissions. Well-designed tax reforms can promote economic growth, job creation and resilience and foster a just transition. At present, a wide range of sectoral tax exemptions and reductions are de facto forms of fossil fuel subsidies, which are not in line with the objectives of the European Green Deal.”
Status quo under the ETD
According to the European Commisssion Consultation document of 22 July 2020 (EU Green Deal – Revision of the Energy Taxation Directive):
- the current European framework for energy taxation has remained unchanged since 2003 and is outdated;
- it hardly delivers on key objectives such as the diversification of energy sources and energy carriers or improvement of energy efficiency of production and consumption, as taxes are not based on the energy content but on the volume/weight of the energy products consumed;
- the absence of an increase in minimum rates for more than a decade at EU level has eroded the tax-induced price signal that was supposed to encourage investment in energy-efficient technology and behaviour;
- as some Member States have increased their national level of taxation since then while others have not, there is risk of growing distortion of competition in the Single Market and an erosion of the tax base in high-taxing countries, notably for motor fuels that can be easily and legally transported across borders;
- in spite of repeated calls for a shift in the taxation, the overall percentage of tax revenues from environmental taxes in the EU has remained relatively unchanged over the last decade.
Also, the presence of sector-specific energy tax exemptions or reductions, notably in the aviation, maritime and road haulage and agricultural/fisheries sectors and for energy-intensive industries, in general substantially weakens incentives for investing in more energy efficient solutions.
Minimum Tax Rates
Minimum tax rates defined in the ETD and applicable in all Member States are the minimum thresholds for the taxation of energy products or electricity.
They were set in 2003 and have never been updated since.
The minimum tax rates may be different for different energy products or electricity; they may also be different for different uses.
For instance, the current minimum tax rate is 33 and 2.1 euro cents per litre of gasoil used as motor fuel and for heating respectively and 0.1 euro cents per kilowatt-hour of electricity for non-business use - they are far from the rates actually applied by Member States.
According to the Commission evaluation, at present, the contribution of the minimum levels of taxation as set by the ETD to the smooth functioning of the single market is limited.
The converging effects of rates on petrol and gas oil used as transport fuels were stronger at the time when the directive was agreed.
However, the ETD’s impact of approximating rates has been diminishing ever since.
Moreover, being based on volumes of consumption, the rates do not take into account the energy content and the externalities involved in the use of different products, in particular environmental externalities.
For example, in transport, the favourable minimum taxation for gas oil used as propellant compared to petrol has contributed to excessive dieselization of the European vehicle fleet resulting in negative consequences on air quality.
The ETD minimum rates on electricity and natural gas account for such an insignificant share of their respective final prices that they can have no positive impact on the internal market or consumer behaviour.
Nominal Tax Rates
Nominal tax rates are the actual tax rates, when no exception applies.
The nominal tax rates vary a lot between the EU Member States, they are different for different uses and for different energy products or electricity.
The said European Commisssion Consultation document of 22 July 2000 gives an example that in January 2020, the current nominal tax rate in the EU varied between 33 and 61.7 and 2.1 and 50.4 euro cents per litre of gasoil used as motor fuel and for heating respectively and 0.1 and 12.5 euro cents per kilowatt-hour of electricity.
Overall, the highly divergent national implementation of the ETD rates has resulted in the fragmentation of the internal market.
The nominal rates should also take into account externalities involved in the use of different products, in particular environmental externalities.
The current EU legislation has several provisions for exceptions in the tax treatment of energy products and electricity in industry.
Energy products and electricity used in industrial processes (e.g. chemical reduction, electrolytic, metallurgical and mineralogical processes, dual use) are out of scope of the current EU legislation.
This means that these energy products and electricity may be taxed at whatever tax rate, or not taxed at all, by each individual Member State. Most Member States do not tax this use.
Energy products and electricity used for combined heat and power generation (CHP) as well as electricity produced from CHP can currently be exempted or differentiated under the ETD.
Also the energy products used to produce other energy products can be exempted by Member States.
Moreover, the current ETD gives Member States the possibility to tax energy products and electricity used by energy intensive companies at a lower level than other companies, and under some conditions even below the EU minimum tax levels.
The effective energy tax rates in industry are low compared to those applied in other sectors, especially for energy intensive companies.
The low effective energy tax rate can be explained by the fact that the greenhouse gas emissions of the industry are covered inter alia in the EU Emissions Trading System and that the energy intensive industry is subject to international competition with industry in third countries with lower environmental and climate ambition than the EU.
While these provisions might be needed to allow individual Member States to introduce energy tax rates well above the EU minima for all other uses that are less exposed to competition on the internal market, this might provide less incentives for investments in clean technologies (be it greenhouse gas or other air polluting emissions), nor for energy-efficiency.
In addition, not all industrial energy consumption is covered by the EU ETS.
Moreover, the EU ETS is a market-based instrument with an annually reducing cap on emissions, thus guaranteeing emission reductions, while leaving it to the market to determine the price, which distinguishes it from a tax that sets price signals based on a rate.
Production of energy products and of electricity
There are provisions in the ETD in relation to the taxation treatment of the production of energy products and electricity.
These are, for example, the optional tax exemptions or reductions for electricity produced from renewable sources, and for energy products used in and electricity produced from Combined Heat Power (CHP) generation.
In addition to these optional exemptions or reductions, there is a mandatory tax exemption for energy products and electricity used to produce electricity, unless they are taxed for environmental purposes.
Some of these provisions could be updated, taking into account new technologies and policies.
Lower Carbon products and applications
Low and zero-carbon fuels, such as sustainable advanced biofuels, bio-methane, synthetic fuels and clean hydrogen will play an important role in the transition to climate neutrality.
The current Directive does not provide for any special tax treatment to low-carbon fuels and applications as compared to fossil fuels.
It also does not differentiate between the environmental performance of biofuels (revised Renewable Energy Directive contains reinforced sustainability criteria for bioenergy and promotes the shift to advanced biofuels based on residues and non-reusable and non-recyclable waste).