Bridges Weekly Trade News Digest • Volume 14 • Number 21 • 9th June 2010

EU Commissioners to Consider Energy Tax Overhaul

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The European Union is set to consider a blanket energy tax that could make renewable fuels cheaper than traditional sources of energy. News of the potential policy shift broke last week when Reuters news agency obtained a draft European Commission document that outlines the proposed changes.

The proposed new tax, which would range from €4 to €30 per tonne of CO2, could make a four percent contribution to the EU’s climate goals, the document said. The tax would be phased in between 2013 and 2018.

Severe fiscal problems in Europe have opened up new political space for the introduction of new taxes, the document noted.

“The global financial and economic crisis has left deep strains on the public finances of most countries,” said the draft document. “This…should play an important role in offering member states a basis…to shift the tax burden away from labour or capital.”

Under the current EU tax regime - which generates roughly €240 billion in revenue each year - renewable fuels like solar power, biofuels and wind energy are more expensive than fossil fuels like coal and natural gas.

“Standard taxation rules discriminate against renewable energies,” officials acknowledged in the Commission document.

The proposed tax would fundamentally change the way in which the European Union sets the value of its energy taxes. Currently, the taxes are based solely on the volume of the fuel in question; the new policy would make the level of tax contingent on the fuel’s energy density as well as the amount of carbon emissions associated with its use.

“What we would be considering doing is to restructure energy taxation so that there would be two elements to an energy tax, an energy component and a CO2 component. That’s the basic philosophy of the idea,” EU taxation spokeswoman Emer Traynor told journalists in Brussels last week, according to a report from the news agency Deutsche Presse-Agentur.

EU commissioners will discuss the proposed energy tax at a meeting on 23 June. The proposal will later be presented to the European Parliament and to member states, which would have to approve any changes before they could take effect.

20% vs. 30%

In related news, the European Commission has issued a new communication analysing how the bloc might move forward on climate change in light of the results of the major climate conference in Copenhagen last December.

The communication compares the potential impacts of two emissions reductions goals that have been under discussion in the EU: a 20 percent cut from 1990 levels, and a more ambitious 30 percent cut.

For now, it seems, the EU is sticking to its 20 percent target, which is the bloc’s official policy. But the 30 percent goal - which was under serious consideration late last year - has not been set aside.

The communication acknowledges that the ongoing economic downturn has put “huge pressure onto businesses and communities” and “huge stress on public finances” across Europe. It also cites the “disappointment” of failing to achieve a binding international agreement in Copenhagen. “But the need for [climate] action is as valid as ever,” it concludes.

The communication discusses “possible options to reach the 30 percent target,” including through carbon taxes.

“The introduction of taxes that target CO2 emissions in sectors not covered by the ETS [Emissions Trading Scheme] represents a straightforward market-based instrument to incentivise lower emissions at the national or European level,” the communication states.

The document also discusses ways to stem “carbon leakage” - the shifting of emissions to countries outside the EU that have relatively lax climate regulations. The communication cites three approaches on this front: supporting European industries through free carbon allowances; “adding to the cost of imports” from countries that do not adopt strict mitigation measures; and taking steps to “bring the rest of the world closer to EU levels of effort.”

The second option - border carbon adjustment - is highly controversial within the EU, although such measures have not been ruled out. The communication cites several potential stumbling blocks to the implementation of BCAs, including logistical and political complications. The communication concludes that such a system “could at best only be envisaged for a limited number of standardised commodities.”

Connie Hedegaard, European Commissioner for Climate Action, acknowledged late last month that border carbon measures remain a “tool in the toolkit,” but stressed that the implementation of such policies could pose significant challenges.

“How are we going to do it? If you think it through it is extremely complicated,” she said, according to a report from DPA.

ICTSD reporting; “Exclusive: EU debt crisis boosts chance of energy tax overhaul,” REUTERS, 1 June 2010; “Commission to propose EU ‘green tax’ on energy in late June,” DEUTSCHE PRESSE-AGENTURE, 2 June 2010; “EU should impose ‘carbon tax’ on developing countries, study finds,” DEUTSCHE PRESSE-AGENTUR, 31 May 2010.