Energy Taxation Directive

by Reinout Debergh & Robin Fontaine

The following article is part of the Fit for 55 series, which analyses all the policies, directives part of the fit for 55 package presented by the Commission in the summer of 2021. This paper shall assess the revision of the Energy Taxation Directive (ETD) [1]. The main objectives of the revision are to:

• 1) align the taxation of energy products and electricity with EU energy and climate policies, so that they deliver on this increased ambition for carbon neutrality.
• 2) preserve the EU single market by updating the scope and structure of tax rates, and rationalise the use of optional tax exemptions and reductions [2].

History of the ETD

The ETD was first established in 2003 and took six years to agree. The key reason why it took so long and why it is still a difficult topic is that taxation requires unanimity in the Council [3]. The Parliament only has a consulting role in the decision-making process [4]. Already in 2011, a proposal to revise the ETD was introduced by the European Commission.  Nonetheless, Member States failed to agree and the proposal was withdrawn in 2015. Frans Timmermans said then: “It would be pointless to let EU institutions waste time and energy on proposals which have no chance of being adopted” [3].

What does the ETD do?

The current ETD was established to set minimum tax rates for energy products, including transport fuels and electricity [5]. Such rates were implemented  to ensure a level playing field in the single market. The ETD is based on the  volume of energy products, rather than their energy or carbon content. Consequently, this means that fossil fuels are taxed less than electricity for heating in most Member States [6]. Petrol and diesel are taxed less than greener alternatives such as biofuel, because one litre of biofuel usually has a lower energy content [5].

With its focus on volume instead of content,  the ETD not only favours fossil fuels over greener alternatives, but favours industries over households. Prices for energy, fossil fuels and electricity tend to be higher for households, compared to certain energy-intensive industries which benefit from reductions [6]. Thus, by design, the current ETD advances industries by negatively impacting low-income households [7]. 

Fit for 55 revision

The ETD revision proposes several changes:

• Tax rates based on energy content and environmental impact, rather than volume;
• Expanding its regulatory scope to include aviation, shipping and fishing;
• Introduction of new energy products such as hydrogen;
• Measures to prevent the double taxation of stored electricity;
• Measures to make it harder to for Member States to exempt or reduce tax rates;
• Increasing minimum tax rates  to reflect current pricing;
• Annual adjustments of minimum tax rates based on the Eurostat price index;
• Reviewing the ETD every 5 years [8].

Since biofuels contain less energy per litre (GJ/L) than fossil fuels, the shift away from volume-based taxation (€/L) will benefit biofuels. By focusing on energy content  (€/GJ), it is the energy itself, and not the volume, that is taxed. The reform has been positively received by NGOs, and furthermore, is expected to promote green hydrogen and synthetic fuels [5]. 

Considering the environmental impact is also positive. The proposal sets higher rates for fossil fuels and lower rates for renewable energy and derivatives. This reduces the relative price advantage of fossil fuels over cleaner fuels. For example, for heating fuels, oil and coal are taxed the highest (0.9 €/GJ) while low-carbon fuels, renewable fuels of non-biological origin and advanced biofuels are taxed the lowest (0.15 €/GJ). Electricity also has the lowest tax rate of 0.15 €/GJ) [9]. This  could help accelerate the transition from coal and gas boilers to heat pumps.  

The regulatory expansion of the ETD to aviation and shipping applies only to intra-EU flights and voyages, thus between two Union airports and ports respectively. It  does not apply to business and pleasure flights. For some fuels, the tax will be implemented gradually over ten years. For sustainable biofuels and biogas, low-carbon fuels, renewable fuels of non-biological origin, advanced sustainable biofuels and biogas, and electricity, the tax rate will not increase during the transitional period. The most polluting fuels (gas oil, petrol, heavy fuel oil, non-sustainable biofuels and kerosene) will be taxed immediately at full rate [9]. 

These changes will only apply once the revised ETD has entered into force. If Member States can agree upon the revision, then the revised ETD will enter into force on January 1st, 2023 [8]. 

Conclusion

A revision of the ETD has been long overdue. The proposed changes can bring the ETD in line with the EU’s climate objectives. To avoid delay, it is now up to the Member States to find an effective agreement next year that will help solve these critical issues facing the energy sector. 

References

[1] Revision of the Energy Taxation Directive (ETD): Questions and Answers, European Commission, https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3662, accessed on 18/11/2021. 
[2] EU Green Deal – Revision of the Energy Taxation Directive, European Commission, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12227-EU-Green-Deal-Revision-of-the-Energy-Taxation-Directive_en, accessed on 18/11/2021.
[3] van Rennsen, S., EU energy tax proposals retain natural gas as “transition fuel”, Energy Monitor, https://www.energymonitor.ai/policy/eu-energy-tax-proposals-retain-natural-gas-as-transition-fuel, accessed 19/11/2021. 
[4] Decision making on EU TAX Policy, European Commission, https://ec.europa.eu/taxation_customs/taxation-1/decision-making-eu-tax-policy_en, accessed on 19/11/2021. 
[5] Frédéric, S., U energy tax plan seeks to end ‘hidden advantage’ for fossil fuels, Euractive, https://www.euractiv.com/section/biofuels/news/eu-energy-tax-plan-seeks-to-end-hidden-advantage-for-fossil-fuels/, accessed on 22/11/2021.  
[6] Heinrich Böll Stugtung Brussels European Union. The revision of the Energy Taxation Directive could underpin a fair and green tax reform in Europe. Available at https://eu.boell.org/en/2021/09/13/revision-energy-taxation-directive-could-underpin-fair-and-green-tax-reform-europe [last accessed on 25/11/2021]
[7] Transforming the transport sector for everyone, how to achieve more socially just and environmentally friendly mobility. German Environment Agency. Available at https://www.umweltbundesamt.de/sites/default/files/medien/1410/publikationen/pp_verkehrswende_fuer_alle_englisch_bf.pdf [last accessed 25/11/2021]
[8] Energy Taxation Directive: The European Union’s framework for the taxation of energy products including electricity, motor and most heating fuels., KPMG, https://home.kpmg/xx/en/home/insights/2021/08/energy-taxation-directive.html, accessed on 19/11/2021. 
[9] Proposal for a COUNCIL DIRECTIVE restructuring the Union framework for the taxation of energy products and electricity (recast), European Commission, https://ec.europa.eu/info/sites/default/files/revision_of_the_energy_tax_directive_0.pdf, accessed on 22/11/2021. 

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