Energy taxation
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.
Industry
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).
Commission Staff Working Document, Evaluation of the Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity ({SWD(2019) 332 final}, 11.9.2019 SWD(2019) 329 final)
Directive 2003/96/EC1 (hereafter “the Energy Taxation Directive” or “the ETD”), lays down the EU rules for the taxation of energy products used as motor fuel or heating fuel and of electricity.
Other uses of energy products and electricity (e.g. energy products used as raw material) are out of scope of the ETD.
All these products are also bound by the common provisions applicable to all products subject to excise duties set out in Council Directive 2008/118/EC2 (also known as “the Horizontal Excise Directive”).
The ETD identifies the energy products subject to the harmonised rules for excise duties, sets minimum levels of taxation (specified in its Annex I), lays down the conditions for applying tax exemptions and reductions, provides for specific rules in addition to the main rules provided for in the Horizontal Excise Directive and, finally, contains some procedural rules.
In this context, the Member States are free to apply excise duty rates above these minimum levels of taxation, according to their own national needs.
All revenue from excise duties goes entirely to the Member States.
The legal basis of the ETD is former Article 93 of the Treaty Establishing the European Community, now Article 113 of the Treaty on the Functioning of the European Union (TFEU) for the harmonisation of indirect taxes, including excise duties, to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.
The ETD has been amended by Council Directive 2004/74/EC5 and Council Directive 2004/75/EC, both adopted on 29 April 2004, in the context of EU enlargement in 2004, and updated by Commission Implementing Decision (EU) 2018/552 of 6 April 20187 to update the references to the codes of the Combined Nomenclature.
In 2011 , the Commission proposed to change the scope and structure of the Directive.
The proposal, amongst other things, aimed at taxing energy products in a way that reflects both their energy content and CO2 emissions.
The European Parliament and the European Economic and Social Committee gave a positive opinion.
However, Member States could not agree on the main political aspects of the proposal after almost four years of negotiations and consequently the Commission decided in 2015 to withdraw its proposal .
Thus, the imbalances and distortions this proposal aimed to address remain unanswered.
European Gas Target Model review and update, ACER, January 2015, p. 35
The Energy Tax Directive currently in force foresees present favourable taxation levels for natural gas.
In 2011 the European Commission put forward a proposal for a revision of the Energy Tax Directive which recommends updating the rules for setting minimum tax rates for fuels (European Commission proposal of 13 April 2011 for a Council directive amending Directive 2003/96/EC restructuring the Community framework for the taxation of energy products and electricity (COM(2011)169/3)).
According to the proposal, the minimum tax imposed on all motor fuels would consist of two parts:
• the energy part, which was proposed to be the same for all fuels (in EUR/GJ) and calculated at the level of petrol; and,
• the CO2 part, taxing at EUR 20 per tonne CO2 according to the emissions produced by each fuel.
If the proposal is made effective, the new minimum resulting taxes will converge more closely, as they will be driven by the energy component.
In this regard natural gas would not be as competitive in terms of tax when compared to the current situation, though the Directive was proposing minimum levels and the final taxation decision could vary between Member States.
Fit for 55 amendments
On 14 July 2021 the European Commission presented the proposal for the ETD revision (the Proposal for a Council Directive restructuring the Union framework for the taxation of energy products and electricity (recast, COM(2021) 563 final).
According to the Commission Communication of the same date ('Fit for 55': delivering the EU's 2030 Climate Target on the way to climate neutrality, COM/2021/550 final) the tax system for energy products "must both preserve the internal market and support the green transition by setting the right incentives. Therefore, a revision of the Energy Taxation Directive proposes to align the minimum tax rates for heating and transport fuels with EU climate and environmental objectives, while mitigating the social impact. The new rules will remove outdated exemptions, for example in aviation and maritime transport, and other incentives for the use of fossil fuels, while promoting the uptake of clean fuels".
According to the Explanatory Memorandum of 14 July 2021 for the Proposal for a Council Directive restructuring the Union framework for the taxation of energy products and electricity (recast) ({SEC(2021) 663 final} - {SWD(2021) 640 final} - {SWD(2021) 641 final} {SWD(2021) 642 final}) new proposal would help reducing the use of fossil fuels in two ways:
- firstly, by setting higher rates for fossil fuels and lower rates for renewables products thereby decreasing the relative price advantage of fossil fuels over less polluting alternatives - to discourage the use of fossil fuels;
- secondly, by reviewing the possibility of tax reductions and exemptions, which under the Council Directive 2003/96/EC of 27 October 2003 lower the taxation of fossil fuels.
When it comes to the structure of tax rates, the proposal puts forward a new structure for minimum tax rates based on the real energy content and environmental performance of fuels and electricity, rather than on volume as is currently mostly the case. Minimum rates will be based on the energy content (expressed in euros per gigajoules) of each product.