EU Member States fail to make progress on reforming the Energy Taxation Directive

Energy - June 6, 2023

As part of its ‘Fit for 55’ package introduced in 2021, the European Commission proposed a revision of the 2003 Energy Taxation Directive. The Energy Taxation Directive established “structural rules and minimum excise duty rates for the taxation of energy products used as motor fuel and heating fuel, and electricity”. The original Directive had some economic sense, as its goal was to protect the integrity of the EU Single Market by preventing price undercutting and competition between Member States.

However, the proposed revision of the Directive is only guided by the climate dogma that is so prevalent in Brussels, and seeks to fiscally punish energy consumers. The stated goal of the revision is to “contribute to reaching our goal of at least 55% emissions reduction by 2030”, and it seeks to do this by establishing a “link between the minimum tax rates of fuels and their energy content or environmental impact”. Currently, the Directive taxes energy based on the volume of fuels, and provides for national exemptions for certain sectors, such as kerosene in the aviation sector or heavy oil in the maritime industry (including fishing) for intra-EU voyages.

What the proposed revision envisions is to group energy products and electricity in “general categories per type, which are ranked according to energy content and environmental performance” so that “the most polluting fuels are taxed the highest”, and to “provide clearer price signals to businesses and consumers alike, helping them to make cleaner, more energy efficient and climate-friendly choices”. For example, fossil fuels and non-sustainable biofuels will be subject to the highest minimum tax rate of 10.75 euros/GJ when used as motor fuel and 0.9 euros/GJ when used for heating. Additionally, the proposal would enlarge the taxable base and remove “national exemptions and rate reductions” (excluding electricity, renewables and the primary sector), which the Commission considers to be “outdated” and “incentives for the use of fossil fuels”.

Although promoting the use of renewables and reducing the tax burden on electricity is very positive to promote the energy transition, electrification, and cheaper energy for Europeans,, shifting the burden onto and punishing other fuels on the basis of ideological dogma is discriminatory, and ultimately passes the economic burden onto European consumers and economic actors who generate wealth. This is the norm with Brussels’ climate agenda, where politicians draw up burdensome regulations but never pay the cost from their own pockets.

The Commission assuage this confiscatory tax by assuring that the proposal will “ensure that consumers and vulnerable households don’t end up paying the price”, all it does is offer subsidies for lower income households. However, this does nothing for hard-working middle class households. Furthermore, as the Commission makes abundantly clear, the Directive is a “tax on output fuels/energy content for all sectors of the economy, across industry, transport and households”. What this means is that businesses will foreseeably pass on the increased costs to  consumers, so households will end up paying higher bills anyway.

Fortunately for European citizens though, this proposed revision is currently bogged down and frozen thanks to the resistance of some Member States, as the revision would require unanimity among all 27 Member States in the Council of the European Union.  The working group of Member States to discuss the minimum tax rates of the new directive was only held recently for the first time, on the 11th of May. But as Czech representatives declared to Euractiv, reaching consensus on minimum tax rates is “a difficult and politically sensitive topic”. They claimed that further work is still needed “with regard to EU minimum levels of taxation and the length of transitional periods”, as some Member States are demanding longer transitional periods for sensitive sectors. No agreement is expected during the current Swedish Presidency of the Council or the succeeding Spanish Presidency.

Member States with important maritime shipping sectors, such as Greece, Malta and Cyprus, are strongly opposed to the proposed abolition of tax exemptions for this sector, under the current Commission proposal. Similarly, countries with important fishing sectors like Spain, Portugal or Denmark, are opposed to the abolition on the tax exemption for fuel in their industry. Furthermore, western and southern Member States with large aviation industries are also concerned about the proposed abolition of tax exemptions for this sector.

And as is the norm, Central and Eastern European member states are the most strongly opposed to Brussels’ climate lunacy, especially in what concerns higher taxes for road transport fuels (road transport is an important sector for these countries), and the increased coal taxes (e.g., 46% of people in Poland use coal to heat their homes).

The proposed reform of the Directive is unlikely to be ratified before the upcoming June 2024 European elections. Citizens will have a golden opportunity to return a strong conservative voice to the European Parliament to halt these disastrous policies and bring an end to the Socialist-Liberal-People’s Party troika that controls the Commission.