Finally, a Fair Fuel Taxation System

By Robert Vierhout | May 12, 2011

A good way for governments to achieve their policy goals is to deploy tax instruments. Nothing new, but often highly disputed, whether it is about giving away or getting money. A recent proposal of the European Commission to modernize EU energy taxation policies confirms that taxation matters generate controversy.

The idea to ‘upgrade’ the Energy Taxation Directive was on paper at the end of 2008, following the adoption of the European climate and energy package. It made perfect sense to deploy tax measures that would help achieve the energy and climate targets set for 2020. Taxation policy within the EU is sensitive, however. Decisions on tax matters require unanimity among the 27 states and, with the June ‘09 EU elections approaching, the proposal went into the freezer. In mid 2010, the idea nearly emerged again, but the climate was still not right. Faced with the financial crisis, the EC did not want to push its luck and be accused of interfering in government revenues. The proposal stayed in the freezer.

Finally, April 2011, it was defrosting time.

What the commission now is proposing makes a lot of sense and is actually partly built upon the experience of some EU countries. Future energy taxes should be based on two components—CO2 emissions and energy density. Both have major implications for ethanol.

A fuel made from biomass does not emit CO2 as compared to fossil fuel, and thus biofuels will be exempted. A precondition, however, is that the biofuel complies with sustainability criteria enshrined in the Renewable Energy Directive.  For all forms of fossil fuel (gasoline, diesel, kerosene, propane and natural gas) a minimal tax will apply of €20 ($22.75) per ton of CO2 emitted.

Energy density taxation will likely also benefit ethanol. By taxing the actual energy that a product generates, measured in gigajoules (GJ), ethanol will be taxed much lower compared to fossil fuel, due to its lower energy density. The harmonized energy density tax is set at €9.6 per GJ for all motor fuels. Unfortunately, it will take until at least 2018 (and possibly another five years) before the taxation difference between gasoline and diesel will be gone. The minimum tax on propane and natural gas is now as low as €1.5 per GJ and for diesel €8.2 per GJ.

This objective to harmonize the energy density tax is crucially important for ethanol because it will mean a boost for driving gasoline-powered cars. In almost all EU countries, diesel taxes are lower, sometimes much lower, than gasoline taxes—a strong driver for an ever-growing diesel fleet. Even though the EU is short on its diesel needs (about 20 percent is imported), most EU governments have not harmonized the two. Only the UK has an equal tax between the two fuels.

The provision to increase the diesel tax to equal gasoline taxes could well be the element that brings the entire proposal into jeopardy, however. The day before the bill was proposed, the German car industry was up in arms and made it very clear that it was poised to torpedo the proposal. German car manufacturers claim that a higher tax on diesel will push consumers away from driving very fuel-efficient diesel cars. It is clear that companies like BMW, Mercedes and Volkswagen fear that the golden diesel technology goose will be butchered. Such a position was to be expected.

Somewhat unexpectedly German Chancellor Angela Merkel echoed the concerns of the car industry and said that Germany would not support the proposal. Oil companies have not yet, publicly, interfered in the debate, but insiders say this sector supports the proposal because it will bring the transport fuel market more in balance. 

The UK government also reacted negatively—not so much because it would not agree to the content of the proposal; it would very well fit the UK policy on energy taxation. No, the mere fact that Brussels is interfering in tax issues is too much for the UK government.

It is obvious that this is not a going to be an easy ride, but regulators don’t have that much time. The bill needs to enter into force by 2013—a very short period for such a sensitive topic and very ambitious, especially if one knows that it took 10 years to adopt the energy taxation law currently in force.

Author: Robert Vierhout
Secretary-general, ePURE
Vierhout@epure.org