The European Commission is expected to propose ending incentives to use fossil fuels by removing existing tax exemptions, according to a draft version of the revised energy taxation directive obtained by EUROPE and to be presented on 14 July as part of the ‘Fit for 55’ legislative package (see EUROPE 12534/27).
Unchanged since 2003, the Energy Tax Directive is outdated and no longer corresponds to the EU’s climate and energy policy, the paper says.
“The directive de facto favours fossil fuel use. Highly divergent national rates are applied in combination with a wide range of tax exemptions and reductions. The wide range of exemptions and reductions are de facto forms of fossil fuel incentives”.
For the Commission, this revision will contribute to the objective of reducing greenhouse gas emissions by at least 55% by 2030, by removing disadvantages for clean technologies and by introducing higher levels of taxation for “inefficient and polluting” fuels.
The Commission therefore proposes a new definition of the tax base as of 1 January 2023. The energy tax will now be based on the energy content of energy products and electricity and their environmental performance, rather than on the volumes consumed.
The text also provides for different minimum levels of taxation for motor fuels, heating fuels, and electricity, which are detailed in an annex that has not yet been made public.
Taxation of aircraft and ship fuels
One of the main changes will be the inclusion of air and maritime transport in the scope of the directive, which will now be subject to a minimum tax rate.
For air transport, the text provides for a phased approach: from 2023 onwards, the minimum tax rate for the use of aviation fuels will start at zero and increase by one tenth of the final minimum rate each year over a period of 10 years, before reaching the final rate.
Sustainable alternative fuels (such as renewable hydrogen, sustainable biofuels, and biogas) and electricity would receive a minimum rate of zero for 10 years.
A different level of taxation will also apply to the use of energy products and electricity for non-commercial aviation and recreational flights, which should be subject to the normal levels of taxation applicable in the Member States.
Energy products and electricity used for intra-EU freight flights should be exempted, with the possibility for member states to tax them either at national level or under agreements with other Member States, as its taxation “could affect the competitiveness of EU carriers”, the paper says.
For maritime transport, polluting fuels used for inland navigation, fisheries, and freight transport will also be subject to different minimum tax rates.
Exemptions for clean energy
The text provides for the possibility of applying exemptions or reductions in the level of taxation for electricity from renewable sources, electricity produced by combined heat and power, renewable hydrogen, advanced sustainable biofuels, bioliquids, or biogas.
It also recognises that targeted reductions may be necessary to take account of social considerations. Thus, energy products and electricity used by households identified as “vulnerable”, according to a harmonised EU definition, could be exempted for a maximum period of 10 years.
In addition, targeted reductions are foreseen to “tackle the risk of a loss of international competitiveness of EU energy-intensive businesses”.
Unanimity of Member States required
The legislative proposal would have to be based on Article 113 of the TFEU and unanimity of the Member States in the EU Council will therefore be required to change the existing rules.
The issue is indeed politically sensitive. It should be recalled that in 2011 the Commission had already proposed that the scope and structure of the Directive be changed. However, no political agreement could be reached (see EUROPE 11177/4), and in 2015 the institution decided to withdraw its proposal.
Member States now seem to recognise the need for a review, as formulated in EU Council conclusions in 2019 (see EUROPE 12384/26).
More recently, at the informal Ecofin Council meeting in Lisbon at the end of May, EU Finance Ministers also expressed their support for the inclusion of air and maritime transport in the Directive (see EUROPE 12726/20).
See the text: https://bit.ly/3jHBC6T (Original version in French by Marion Fontana and Damien Genicot)