Energy Products Tax Framework Directive (EU)

Energy Products Tax Framework Directive, EU

Background

After six years' negotiations, the directive was finally agreed by EU finance ministers in March 2003.

Introduced

The Council, following the examination of the European Parliaments opinion of 24 September 2003, adopted the Directive on a Community framework for the taxation of energy products. It entered force from 1st January 2004.

Aims

The main aim of the energy tax is to reduce greenhouse gas emissions by using energy/CO₂ taxes such that the United Nations Framework Convention on Climate Change is addressed (Speck et al., 2006).

The Directive aims to:

reduce distortions of competition that currently exist between Member States as a result of divergent rates of tax;

reduce distortions of competition between mineral oils and the other energy products that have not been subject to Community tax legislation up to now;

increase the incentive to use energy more efficiently (so as to reduce dependency on imported energy and cut carbon dioxide emissions);

and allow Member States to offer companies tax incentives in return for specific undertakings to reduce emissions.

Design

Scope

The Directive widens the scope of the Community minimum rate system (previously limited to mineral oils) to all energy products - chiefly coal, gas and electricity, as well as updating the minimum rates for mineral oils which have not been revised since 1992. For all these products, only their uses as motor fuel or heating fuel are taxed, not their use as raw materials, in chemical reactions or in electrolysis.

Reductions

Energy products used as motor fuel for certain industrial and commercial purposes and those used as heating fuel will normally be taxed at lower levels. To minimise competition issues, specific provisions are proposed concerning the taxation of diesel used by hauliers engaged in international activities. Member States are allowed to differentiate between commercial and non-commercial diesel. Business use of energy products may be taxed at a lower rate than non-business.

Exemptions

Member States are also allowed to apply other exemptions or reduced levels of taxation where this will not be detrimental to the proper functioning of the internal market and will not affect competition. In September 2003, the European parliament called for a reduction in the directive's many exemptions. None of its suggestions has been accepted by EU governments. As a result of the numerous compromises required to win the required unanimous backing from the EU-15 states, the directive will have few near-term consequences for tax levels on most energy products. Even so, its existence greatly strengthens the longer-term potential for upwards harmonisation of EU energy tax rates. In response to the directive's formal approval, the European Commission said it would propose transitional arrangements on how the ten new member states of the EU should comply with the rules.

Expectations (Ex ante Analysis)

The Directive should introduce greater coherence into the treatment of energy-intensive and other industries and will mean both new taxes and higher taxes in many EU countries. It will also enable member states to tax aviation fuel for domestic flights or, through bilateral agreements, for flights to and from other member states (ENDS, 2004). The European Commission has proposed amendments to 2002's landmark EU energy tax framework directive to allow a series of derogations from the rules for states that joined the EU in 2005. Subject to unanimous approval by current EU governments, all accession states bar Cyprus were allowed to apply taxes on various energy products at rates lower than specified in the directive. Most will have to be gradually aligned with EU minima and all derogations will end by 2012. Several existing EU states won similar exemptions.

In 2009, it was announced that the European commission will put forward a proposal to revise the 2003 EU energy tax directive in early April ’09 as part of a package of measures on environmental taxation (ENDS, 2009).

Elements of April's green tax package will include a draft law allowing EU member states to apply reduced VAT rates to certain green products. The Commission will also issue a policy paper on the role of taxes in energy and environmental policy.

The split between the energy and environmental component of the tax rates would be similar to that in a proposal on car taxation, where half of the rates is linked to CO₂ emissions (ENDS, 2009).

Drawbacks

Criticisms centre on the way that ministers weakened proposed minimum energy tax rates, and introduced rebates and exemptions. As a result, the agreement will produce almost no near-term increases in energy taxes in existing EU member states. Furthermore, a first review of tax rates is due only by 2012. Ministers have effectively "ditched any idea of using EU energy taxation for environmental purposes", according to the EEB. It urged the European parliament - which must deliver a non-binding opinion on the proposal - to demand higher minimum tax rates and a clear mechanism for periodic reviews.

References

Environment Daily News Service, 2004, available at: http://www.consilium.eu.int/pressData/en/envir/77784.pdf

ENDS, 2009. EU to table revised energy taxation directive. ENDS Europe Environmental Daily News Service, 4^th March 2009.

Speck et al,

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Energy Products Tax Framework Directive, EU

Background

After six years' negotiations, the directive was finally agreed by EU finance ministers in March 2003.

Introduced

The Council, following the examination of the European Parliaments opinion of 24 September 2003, adopted the Directive on a Community framework for the taxation of energy products. It entered force from 1st January 2004.

Aims

The main aim of the energy tax is to reduce greenhouse gas emissions by using energy/CO₂ taxes such that the United Nations Framework Convention on Climate Change is addressed (Speck et al., 2006).

The Directive aims to:

reduce distortions of competition that currently exist between Member States as a result of divergent rates of tax;

reduce distortions of competition between mineral oils and the other energy products that have not been subject to Community tax legislation up to now;

increase the incentive to use energy more efficiently (so as to reduce dependency on imported energy and cut carbon dioxide emissions);

and allow Member States to offer companies tax incentives in return for specific undertakings to reduce emissions.

Design

Scope

The Directive widens the scope of the Community minimum rate system (previously limited to mineral oils) to all energy products - chiefly coal, gas and electricity, as well as updating the minimum rates for mineral oils which have not been revised since 1992. For all these products, only their uses as motor fuel or heating fuel are taxed, not their use as raw materials, in chemical reactions or in electrolysis.

Reductions

Energy products used as motor fuel for certain industrial and commercial purposes and those used as heating fuel will normally be taxed at lower levels. To minimise competition issues, specific provisions are proposed concerning the taxation of diesel used by hauliers engaged in international activities. Member States are allowed to differentiate between commercial and non-commercial diesel. Business use of energy products may be taxed at a lower rate than non-business.

Exemptions

Member States are also allowed to apply other exemptions or reduced levels of taxation where this will not be detrimental to the proper functioning of the internal market and will not affect competition. In September 2003, the European parliament called for a reduction in the directive's many exemptions. None of its suggestions has been accepted by EU governments. As a result of the numerous compromises required to win the required unanimous backing from the EU-15 states, the directive will have few near-term consequences for tax levels on most energy products. Even so, its existence greatly strengthens the longer-term potential for upwards harmonisation of EU energy tax rates. In response to the directive's formal approval, the European Commission said it would propose transitional arrangements on how the ten new member states of the EU should comply with the rules.

Expectations (Ex ante Analysis)

The Directive should introduce greater coherence into the treatment of energy-intensive and other industries and will mean both new taxes and higher taxes in many EU countries. It will also enable member states to tax aviation fuel for domestic flights or, through bilateral agreements, for flights to and from other member states (ENDS, 2004). The European Commission has proposed amendments to 2002's landmark EU energy tax framework directive to allow a series of derogations from the rules for states that joined the EU in 2005. Subject to unanimous approval by current EU governments, all accession states bar Cyprus were allowed to apply taxes on various energy products at rates lower than specified in the directive. Most will have to be gradually aligned with EU minima and all derogations will end by 2012. Several existing EU states won similar exemptions.

In 2009, it was announced that the European commission will put forward a proposal to revise the 2003 EU energy tax directive in early April ’09 as part of a package of measures on environmental taxation (ENDS, 2009).

Elements of April's green tax package will include a draft law allowing EU member states to apply reduced VAT rates to certain green products. The Commission will also issue a policy paper on the role of taxes in energy and environmental policy.

The split between the energy and environmental component of the tax rates would be similar to that in a proposal on car taxation, where half of the rates is linked to CO₂ emissions (ENDS, 2009).

Drawbacks

Criticisms centre on the way that ministers weakened proposed minimum energy tax rates, and introduced rebates and exemptions. As a result, the agreement will produce almost no near-term increases in energy taxes in existing EU member states. Furthermore, a first review of tax rates is due only by 2012. Ministers have effectively "ditched any idea of using EU energy taxation for environmental purposes", according to the EEB. It urged the European parliament - which must deliver a non-binding opinion on the proposal - to demand higher minimum tax rates and a clear mechanism for periodic reviews.

References

Environment Daily News Service, 2004, available at: http://www.consilium.eu.int/pressData/en/envir/77784.pdf

ENDS, 2009. EU to table revised energy taxation directive. ENDS Europe Environmental Daily News Service, 4^th March 2009.

Speck et al,