As part of its legislative package to achieve the EU’s target of reducing greenhouse gas emissions by at least 55% by 2030 (‘Fit for 55’), the European Commission presented on Wednesday 14 July a proposal to revise the Energy Taxation Directive, which has remained unchanged since 2003 (see EUROPE 12755/10).
“We also need taxes to positively influence our behaviour, and that is why we are revising our (energy) taxation directive. It’s almost twenty years old, it still subsidises fossil fuels, and we have to remove exemptions for fossil fuels and change the method”, said EU Commissioner for Taxation Paolo Gentiloni at a press conference.
New structure
The European Commission proposes a new definition of the tax base from 1 January 2023. Energy taxation would be based on the energy content (expressed in €/GJ) of energy products and electricity and not on the volumes consumed.
“We will not tax CO2, because all sectors will be affected by the extension of the Emissions Trading Scheme (ETS); so we will not tax CO2 twice. But we will tax the energy content”, explained a European Commission official.
This new tax base goes hand in hand with a new ranking system. Fuels will now be classified according to their energy content and environmental performance. Member States will have to respect this ranking in their national system so that the most polluting fuels are the most taxed.
Extended scope of application
The scope of the Directive is extended to include energy products or uses of energy that were previously outside the EU tax framework, such as mineralogical processes.
The revision also removes national exemptions for polluting fuels, such as diesel in agriculture, and ends tax breaks for fossil fuels in energy-intensive industries.
Another key measure is that paraffin used as fuel in the aviation industry and heavy fuel oil used in the maritime industry will no longer be fully exempt from taxation for intra-EU travel.
The text also streamlines the application of reduced rates, leaving much less room for Member States to set rates below the minimum, except for cleaner energies, according to the European Commission.
Discounted rates
The current minimum rates were set in 2003 and had never been updated to reflect current prices. They will now be indexed to inflation each year.
According to the new classification, conventional fossil fuels, such as diesel and petrol, and non-sustainable biofuels will be subject to the highest minimum rate, i.e. 10.75 €/GJ when used as motor fuel and 0.9 €/GJ when used for heating.
The next category of rates applies to fuels such as natural gas and non-biological non-renewable fuels which, although fossil-based, can still lend support to decarbonisation in the short to medium term. Minimum rates of 7.17 €/GJ when used as motor fuel and 0.6 €/GJ when used for heating will apply to this category for a transitional period of 10 years before being taxed at the same rate as conventional fossil fuels.
For sustainable but not advanced biofuels, the text provides for a minimum rate of 5.38 €/GJ when used as motor fuel and 0.45 €/GJ when used for heating.
The lowest minimum rate of 0.15 €/GJ will apply to electricity (regardless of use), advanced sustainable biofuels and biogas, and non-biological renewable fuels such as renewable hydrogen. Low-carbon hydrogen and related fuels will also benefit from the same rate for a transitional period of 10 years.
For the taxation of paraffin for intra-EU passenger flights, the European Commission proposes a gradual approach whereby, from 2023 onwards, the minimum tax rate will increase each year over a period of ten years before reaching the final rate of 10.75 €/GJ, as for petrol used in road transport.
Intra-EU leisure flights are already taxed under the current rules, and the new proposal extends this taxation to business flights, the European Commission also points out. According to the proposal, both situations will therefore be taxed at least at the minimum rate of 10.75 €/GJ from the outset, without a transitional period.
In order to encourage the use of cleaner energy in the aviation and maritime sectors, sustainable and alternative fuels will benefit from a minimum zero tax rate for a transitional period of 10 years when used for aviation and maritime navigation.
Safety nets
The text provides for safety nets for low-income households, which could, for example, be compensated for increased taxation on fossil fuels used for heating in the form of access to financing for low-carbon and energy-efficient goods and appliances.
In addition, Member States will be able to decide to exempt vulnerable and fuel poor households from the taxation of heating fuels and electricity.
Revenues from environmental taxes could also be recycled through lump-sum transfers to increase the disposable income of the poorest households.
The legislative proposal will have to be adopted by unanimity of the Member States in the Council of the EU. The European Commission, which already sees challenges ahead, insists on the interdependence and complementarity of the ‘Fit for 55’ proposals.
“We have tried to put together a balanced package. If someone doesn’t like something in the package, we can talk about it, but you can’t argue with the target, which must always be a 55% reduction (of carbon emissions) because that is set by law. So, if someone doesn’t like one part of the package, let them propose an alternative that gives the same results”, said European Commission Executive Vice-President Frans Timmermans.
See the proposal for the directive: https://bit.ly/3wF7oUI (Original version in French by Marion Fontana)