The EU’s broken Energy Taxation Directive: ripe for revision

The ETD includes generous scope for tax exemptions, giving member states maximum flexibility in raising taxes, while balancing their industrial needs against stimulating action on climate protection.

Lower taxes, for instance, are allowed for commercial diesel fuel, including public transport, and exemptions can be given for environmental and health purposes as well as for renewable energy. It’s nothing new; such incentives existed since before World War II to support economic development through haulage, construction and agriculture.

Unfit for purpose

However, faced with the EU’s current environmental and CO2reduction priorities, and the proper functioning of internal markets, the ETD is starting to unravel. Take for example the Luxembourg loophole, where French, German and Belgian truck and car drivers queue to fill their tanks in Luxembourg with diesel for much less than in their own countries.

The Commission now wants to revise the directive within the European Green Deal strategy — in June 2021. In 2019, the Council agreed, saying that “while the directive initially made a positive contribution to the internal market, current rules do not contribute to the new EU regulatory framework and policy objectives in the area of climate and energy…”

That said, there are still notable gulfs between the two institutions in their language and political goals. For example, not a single word about fossil fuel subsidies is uttered in the Council statement.

Ursula von der Leyen, President (L) and Frans Timmermans (R) after the adoption of the Green Deal in December 2019

The Commission knows it is facing huge obstacles, not least in garnering consensus among member states. Poland and Czech Republic are against the revision. Sweden is resisting changing the sacred unanimous voting rule in place on anything relating to tax.

In March this year, the Commission published an impact assessment on reviewing the ETD. Key among the findings was the statement that the directive is responsible for the “persistence of fossil fuel subsidies”.

“The ETD is not in line with EU policy objectives,” says the report. “The wide range of exemptions and reductions are de facto forms of fossil fuel subsidies, which are not in line with the objectives of the European Green Deal.

The report goes on to say that “this increases the fragmentation of the internal market and in particular, distorts the level playing field across the involved sectors of the economy”.

Following Investigate Europe’s digging into the issue, several important conclusions stand out.

One is that the ETD establishes a vast number of mandatory subsidies: for aviation, maritime transport and for the use of coal, gas and oil-producing electricity.

Secondly, this “Swiss cheese” is a threat to internal market rules, creating competition blackholes.

Finally, fossil fuel subsidies create opportunities for member states to evade strict EU state aid rules.

Feedback frenzy 

In April 2020, the Commission wound up the feedback period on the sketch of its ETD revision for the corporate sector, NGOs and energy stakeholders and the public. It received 180 responses, many of them from corporate stakeholders opposed to the revisions. They wanted energy tax exemptions to be maintained. Some even raised the possibility of legal action against the EU.

The main arguments from the big hitters in European aviation, cement, gas, oil, electricity generation, mining and metal, focussed on:

  • The potential erosion of international competitiveness
  • the need for time to deal with the economic aftermath of Covid-19
  • energy security
  • carbon leakage
  • increase of electricity costs
  • national sovereignty

Energy security in Portugal, for example, is one reason why the country is so receptive to oil extraction, despite an apparent contradiction with the policy of decarbonisation. Poland, meanwhile, is fiercely defensive of its coal industry and sees this as an issue of national sovereignty.

Poland is home to The Bełchatów Power Station, the world’s largest lignite-fired power station

A note of encouragement for the EC

Perhaps surprisingly, in light of the views of the lobby groups, several national governments share the European Commission’s position that ETD has outlived its purpose.

João Pedro Matos Fernandes, Portugal’s Minister of Environment and Energy Transition, said: “At this stage, the directive is so outdated that it can’t even be considered as a tax harmonisation attempt.  

“The elimination of environmentally harmful subsidies, including the exemptions to which fossil fuels are still subject in Europe, is clearly an important line of action to achieve carbon neutrality.”

Susanne Åkerfeldt, in charge of environmental tax issues in Sweden, referred to a previous, failed effort in the early 2010s to revise the ETD, saying it could run into similar problems this time. But the position was clear: “The Swedish government sees the need for the review of the ETD.”

Plus ça change, plus ça reste le même (The more things change, the more they stay the same)

So what has changed now? Member states are no less protective of their right to keep tax issues as a national competence. Sure, Britain, which was the most zealous guardian of this right, has left the EU, but others defend it too and demand that the principle of the unanimous vote remain in place, such that one member state, large or small, can still block reform. All in all, it doesn’t augur well.

Catch 22

The Commission has a plan to side-step the unanimity bind, based around classing ETD revision as fundamentally an environmental rather than a tax matter, since it is part of the Green Deal. Under EU law, environmental issues can be decided by qualified majority.

There is a catch, in that the Council must agree unanimously on taking such a measure. But all this has yet to be worked through and what may come out in the end is what EU sources describe as a “Swiss cheese” law: full of holes.

Nonetheless, Frans Timmermans, the Dutch Vice-President of the Commission in charge of the Green Deal, does not seem overly optimistic. “That it would be better if we had one European tax system for energy, that’s clear. It would remove competition on this between member states. But that is not the situation we have. So you know, when you have my job, you work with what you have, not with what you would like to have,” he said.

Frans Timmermans, VP of the European Commission
Frans Timmermans

Many experts hope the revision does indeed work, and that subsidies of fossil fuels in the EU will stop.

Claudia Kemfert, Head of Energy, Transport, Environment at the German Institute for Economic Research, said: “When it comes to harmonising energy taxes, Europe, and above all the members of the European Parliament, must not capitulate, no matter how great the resistance.”

Another expert spoke of a Plan B should the Council fail to reach unanimous agreement. Jos Delbeke, former Director General of DG Clima in the Commission, explained the potential for “enhanced cooperation”.

“One possibility,” he said, “is that several member states already start harmonising their energy taxation policies before a deal is made at EU level. Such a form of enhanced cooperation would mean progress for some member states without them having to wait for everyone to agree. For instance, some of the larger member states could agree to levy a small tax on kerosene. That would increase the pressure for other member states to join and it might accelerate the phase-out of other fossil fuel subsidies.”

It is one of those classic issues that the EU seems to specialise in; deeply technical, deeply jargonised, deeply complex. But the EU is focussed on reducing fossil fuel subsidies and fulfilling its climate ambitions. And that makes revision of the ETD also deeply important.

Edited by Paul Anderson