Energy Tax Directive Revision

European Environment Bureau (EEB)Brussels, 17.05.2011

Kai SchlegelmilchEconomistVice President of Green Budget Europe/GBE

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Structure of presentation

1) Introduction of Green Budget Germany/Europe (GBG/GBE)

2) Need for an Environmental Fiscal Reform (EFR)3) EFR Reform Elements in Germany4) EFR Approaches in Europe5) EFR Approaches Globally6) Relevance for Energy Efficiency7) Further Information8) Conclusions

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1. Green Budget Germany/Europe (GBG/GBE) –Forum Ökologisch-Soziale Marktwirtschaft (FÖS)

• Non-Profit Non-Governmental Organization– founded in 1994, now 6 employees and 6+ interns– >90% of funding through studies, lobbying,

conference organisations, trainings hence depending on 3rd party financing

• Fields of expertiseCommitment to Market-Based/-Improving Instruments in environmental

policy such as:– Environmental Fiscal/Tax Reform: Taxes/Charges on energy and

resources– Cutting of environmentally harmful subsidies

• Main activities– Studies (on ETR/EFR and environmentally harmful subsidies) and

Newsletters, Conferences and Trainings– Projects for the German Environment Protection Agency (UBA),

European Climate Foundation, Greenpeace, WWF– GBG is internationally very active…

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Organisation of the Global Conference on Environmental Taxation in 2007

Green Budget Europe (GBE) was set up as project of GBG in 2008 = European network for market-based/improving instruments

Next GBE-Conference at EEA/Copenhagen on 15th/16th September 2011

GBE has contributed to many international conferences. GBE has carried out further consultations of EU-Commission, OECD, European Environment Agency (EEA), World Bank, Governments, NGOs and other stakeholders in countries such as Morocco, China, Thailand and Vietnam.

On behalf of GIZ, the German development aid agency (www.giz.de), Green Budget Germany has developed a Training Manual to train trainers on EFR in developing countries.

It is also translated into French and Spanish.Further applications are most welcome. It can also be applied in industrialised countries.

1. GBE is internationally very active

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• Climate Crunch- Need to tackle climate change and environmental pollution- Need to trigger innovations and jobs

• Energy Crunch- Need to secure energy supply, energy efficiency and renewable

energies- Need to reduce our energy imports and bill

• Budget Crunch- Lived beyond one‘s needs for decades- Deepened due to the financial crunch

In a market economy the polluter pays principle has to be applied all over: All have to pay for the full costs!

2. Need for Environmental Fiscal Reform (EFR)

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2. Need for Environmental Fiscal Reform (EFR)

„Perverse“ incentives dominate– Market prices are THE signal in an economy, hence

they should work for and not against environmental protection

• Penalties for “green behavior” (trains – airplanes / electricity generated by coal power – green electricity)

• Subsidies for non-environmentally friendly behavior• Taxes and levies system heads to the wrong direction:

“Goods” are taxed instead of “bads”

Policy resultsInefficient use of energy, unemployment,budget deficits/Waste of taxpayers money,climate and environmental protection is not profitable

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3. EFR Reform Elements – Implemented in Germany

1999-2003• Social security contributions were reduced• Transport/heating fuel taxes were increased• An electricity tax was introduced between• Impacts: -2-3% CO2-emissions, first time ever lasting reduction of fuel

sales (-17% incl. oil price impact), 250,000 additional jobs created2011

– Ticket fees on air transport– Charge on nuclear fuel– Heavy goods vehicle toll extended– Reduction of industrial exemptions from the energy tax– Financial transaction tax (generally adopted, started as a banking

charge)– Shifting the tax base for company cars on CO2-emissions (not

implemented, in the opposite: Attempt to enlarge tax benefits according to coalition treaty)

• GBG proposed all these elements + more in a study on behalf of the Heinrich-Böll-Foundation: Most were implemented (http://www.foes.de/pdf/2010-10-HBF_GreeningTheBudget.pdf ):A great success story of the combination of providing timely information with lobbying activities.

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4. Energy taxation on EU-level

On the one hand:• Legal requirement for unanimity voting makes progress very difficult.• Steps so far:

- 1993: Minimum tax rates for all oil products were introduced when the internal market came into force- 2004: Broadening this principle of minimum tax rates to all other energy products whilst increasing the minimum rate for mineral oil taxes (EU-energy tax directive)The then forthcoming accession made the modest breakthrough possible as acceding countries would likely have to do more than the then EU-15.

On the other hand:• The EU is the first and only region which requires an energy taxation

from all Member States. Several Member States made positive experiences with ETR/EFR, hence this potential should be further exploited.

• Since 13.04.2011, the European Commission published a proposal for a revision of the Energy Tax Directive.

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EFR-Elements: Taxes on light heating fuel in Europe (€-Cent/liter)

Germany still has to catch up in this area

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All EU countries have some kind of green taxes

Examples from EEA 2005

1. Witness of EU-Creativity!2. Many roads to Brussels!3. Autonomy from neighbours!4. Similar situation in new MS

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Positive GDP-effects of ETR go up to 0.5 percent

GDP-EFFECT OF ETR (DIFFERENCE TO BASE CASE IN %)

Source: COMETR 2007

COMETR: ETR produces a small ‘double dividend’ effect in every

country, with GDP increasing by up to 0.5 % compared to the reference case.

0.4% in Germany

There are no losers!

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Ecotaxes reduced GHG emissions by 2-6 percentEFFECT OF ETR ON GHG EMISSIONS (DIFFERENCE TO BASE CASE IN %)

–3.3% in Germany

Revision of the EU Energy Tax Directive

The person in charge of it is:Rolf DIEMERHead of UnitUnit C2 – Environment and other Indirect TaxesEuropean CommissionDG Taxation and Customs Union[SPA 3 05/110]B-1049 Brussels – BELGIUMTel.: 0032-2-2961075Rolf.Diemer@ec.europa.eu

http://ec.europa.eu/taxation_customs/taxation/excise_duties/gen_overview/index_en.htm

http://ec.europa.eu/taxation_customs/taxation/excise_duties/energy_products/index_en.htm

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Policy background

• March 2007 European Council conclusions on energy and climate topics and targets with several legislations following.

• EU climate and energy strategy (2013-2020): 20% cut in emissions, 20% improvement in energy efficiency against business-as-

usual 20% share of renewables by 2020

• Crisis exit strategy: Austerity packages and quality of revenue

• Europe 2020 Strategy: sustainable growth for a more resource efficient, greener and more competitive economy, demand for an ETR/tax shift

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Two policy areas

• 20% cut in emissions by 2020 (30% in case of international agreement reached)

• division into two areas:

Emission Trading System: EU cap single instrument uniform price signal

„Effort-sharing“:national reduction objectives, taking GDP into accountTransferable!Energy taxation, partly EU-harmonised, but still many national features.

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Existing Directive on Energy Taxation: 2003/96/EC

• Energy products are only taxed when they are used as motor or heating fuel

• Energy tax applies to electricity, although there are several exemptions Member States can introduce

• Some sectors excluded: Energy products used as raw materials, for the purposes of chemical reduction, in electrolytic and metallurgical and in mineralogical processes, and nuclear fuels are out of the scope of the Directive

• The "levels of taxation" applied by the Member States may not be lower than the minimum rates set in the Directive (higher minima for transport than for heating fuels)

• Possibility of tax exemption for biofuels• Taxable base

– Mineral oil products: volume– Coal, gas, electricity: energy content

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Directive 2003/96/EC – Shortcomings of the current state of play

• NO signal to reflect CO2 emissions of energy products• NO signal to reflect the energy content of the

product used • Little incentive to develop markets for alternative

energies • NO European framework for CO2 taxation• NO sufficient coverage of 50% of emissions outside

ETS• NO clear distinction with ETS: double burden or

loopholes to evade responsibility for emissions

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Weniger energieintensives Produzierendes Gewerbe (60%)

Privater Verkehr

Private und öffentliche Haushalte

Gewerbe/Dienstleistungen

(100%)

Ohne Ökosteuer, aber EH

Z.B. Alu - und Chemieindustrie

0% ÖSR: Prozessemissionen (z.B. Kalk),Dual Use (Kokskohle in Stahlindustrie), Herstellerprivileg (Eigenverbrauch Mineralölindustrie)

60% ÖSR:Weniger energieintensive Anlagen des Produzierenden Gewerbes (z.B. Maschinenbau/Elektronik) mit EH-pflichtigen Emissionen

100% ÖSR:z.B. Stromerzeugung >20 MW in Krankenhäusern

*SAG = Spitzenausgleich; verbleibende Grenz-

steuerbelastungnur 3 %

EH, aber kein SAG*

Industrie -anlagenim EH,

mit SAG*

Randbereiche im Emissionshandel (EH)

Energiewirtschaftim EH, mit SAG*

Kein EH, nur

SAG Bereich unterliegt EH

OVERLAPS OF ECOTAX AND EMISSIONS TRADING IN D(x %) = Prozent der Regelsteuersätze im jeweiligen Verbrauchsbereich

Öffentlicher Verkehr (56%)

INTERPLAY OF ECOTAX AND EMISSIONS TRADING IS QUITE COMPLEX

Quelle: FÖS-Analyse

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Why revision of the EU Energy Tax Directive now?

• MS are designing now their strategies to meet agreed targets in the most cost-effective way and exit the crisis

• MS and stakeholders need now legal certainty of possible uses of taxes in this context

• Revision ideally applicable as from 01.01.2013 (third phase Emission Trading System (ETS))

• Opportunity for a green tax shift: shift taxation from labour to pollution and energy use to help create jobs and boost growth

• Start building a green economy only possible with the right incentive structures

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New structure of energy taxation

• Tax reconstructed according to CO2 emissions and energy content:– A part based on CO2 emission of the energy product. CO2

taxation would be zero for all sources of energy that currently are, or will in the future, be recognised as CO2-free.

– A part based on energy content per GJ, regardless of the energy product, thus providing an incentive to save energy.

• Because: logical and technology neutral approach automatic incentive for less polluting energy products and

generalised CO2 price signal vital for the shift towards low carbon economy

remove unjustified subsidies for certain fossil fuels (diesel, coal) consistent treatment of all energy sources

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Link to Emission Trading System

Framework for CO2 taxation as complement to the EU emission trading scheme - no double burden or regulation for business; - Level playing field for the sectors exposed to carbon leakage- no overlap CO2 tax with ETS: CO2 tax complements ETS with alternative market-based instrument for small installations excluded from

the EU ETS

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Motor fuels

• New minimum rates introduced in stages until 2018– Tax based on CO2 emissions: 20€/t CO2 as of 2013– Tax based on energy content: gradual increase to 9.6€/GJ by 2018

• This results in the following overall rates expressed in current units:

Current rate

1/1/2013

1/1/2015

1/1/2018

Petrol (euro per 1000 litres)

359 359 359 359

Diesel (euro per 1000 litres)

330 359 382 412

Kerosene (euro per 1000 litres)

330 350 370 386

LPG (euro per 1000 Kg) 125 125 311 501Natural gas (euro per GJ) 2.6 2.6 6.6 10.8

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Motor fuels

• As of 2023 MS also need to respect relationship between the different products in their national rates

• Example: diesel / petrol:– Currently: minima for petrol higher than for diesel (359 over 330

€/1000l) in spite of higher energy content of diesel

– Revision: Alignment of tax treatment on the basis of energy content and CO2 will lead

to higher per-volume rate for diesel (412 against 359 €/1000l) by 1/1/2018 (as 1 litre diesel emits around 16% more CO2 than 1 litre of petrol/ has higher energy content)

MS will have to reflect the relation in national rates, but will be given time for adjustment until 2023.

Possibility for MS to apply reduced rate to commercial diesel deleted (only used by 5 MS)

– Consequences: stabilisation of current petrol/diesel demand split Under-capacity of Europe: security of supply will improve

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Alternative motor fuels: LPG/CNG

• Currently: – Minimum rates for LPG and CNG considerably lower

than for other motor fuels– Possibility for MS to apply full exemption

• Revision:– Alignment of tax treatment of LPG and CNG to other

motor fuels according to energy content in principle by 1/1/2021.

– Transitional period until 1/1/2023 during which MS may continue to apply lower tax rate down to zero

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Heating fuels

• New minimum rates introduced as of 2013

• As of 2013 MS need to respect relationship between the different products in their national rates and fix equal level for respective use

• 9 MS may postpone introduction for the CO2 part of the tax until 2020

• MS will be able to set their own rates above the minima

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Biofuels

• Currently: – fully taxed (like equivalent fossil fuel) + option to fully

exempt (subject to State Aid control)

• Revision:– alignment of tax treatment to other motor fuels according

to energy content (therefore removal of current disadvantage stemming from generally lower energy content of biofuels)

– no CO2 tax applies to sustainable biofuels as emission factor is zero

– unsustainable biofuels will be treated as conventional fuels– until 31/12/2023 MS may continue to apply lower specific

energy tax rate

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Electricity/nuclear energy

• Currently: – Electricity taxed when used ("at output"). – To avoid double taxation, energy products used for the generation

of electricity exempted from taxation, although MS retain the right to tax those products for reasons of environmental policy.

– Nuclear fuels are no energy products for the purposes of Directive 2003/96/EC (out of the scope of the directive).

• Revision:– No systematic change: taxation at output (energy tax only as no

emissions at point of use)– Fuels used for generation mostly exempt from CO2 tax as subject

to ETS; CO2 tax to apply to small installations exempted from ETS– Nuclear taxed as all other electricity; by definition there is no CO2

element. – Note: MS can adapt level of electricity tax independently of other

fuels

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Possibility to apply reduced rates for business

• Currently: – Possibility for reduction of tax rates down to minima if businesses

are energy intensive or if equivalent arrangements are in place – Possibility for reduction of tax rates down to zero for energy-

intensive businesses or to 50% of Community minima for other businesses if alternative measures deliver broadly equivalent environmental effect to Community minima

• Revision:– MS would retain flexibility to apply reduced tax rates for certain

businesses above the Community minima– No possibility for MS to reduce energy-content based tax rates

below minima– CO2-based taxation: a special compensation mechanism will apply

to installations from sectors under a risk of carbon leakage, which will result in taxation below Community minima in some cases. MS will be obliged to provide a tax credit to those installations based on their past energy consumption, and calculated on the basis of a reference fuel (benchmark).

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Particular sector: agriculture

• Currently: – fully taxed + option to fully exempt all energy products

and electricity used in agriculture – MS can apply reduced tax rates to motor fuels used in

agriculture (e.g. 21 €/1000l for diesel)

• Revision:– CO2 tax has to be applied in full, but COM will analyse

whether agriculture should also benefit from the tax credit for carbon leakage sectors

– energy content part of the tax: possibility to fully exempt if the sector provides a "counterpart" (equivalent measures in terms of energy efficiency)- notion left to MS

– Diesel used in off road machineries (tractors): will be still taxed as heating not as motor fuel (= lower rate)

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Particular sector: households

• Currently: – MS may apply rates to zero to natural gas, coal and

electricity if used for domestic heating

• Revision:– MS will retain option to fully exempt households

(both CO2 and energy content parts)– exemption extended to all heating materials

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Particular sectors: coal

• Currently: – The most CO2 emitting and today the least taxed energy

product– Important for Europe's energy security but needs to be

used in a sustainable way

• Revision:– The revision will lead to an increase in the minimum tax

for coal– postponement of CO2 part of taxation to after 2020 in

those MS where less effort is required for emission reductions

– possibility to fully exempt households

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Regionalisation of taxes

• Currently: – No possibility for regional variation in tax rates in

current directive– regions may be allowed to reduce rates on the basis of

individual derogations according to art. 19

• Revision:– Possibility for individual MS to allow regions to

increase their tax rates over the national tax rate on the basis of explicit country-specific authorisation (ES and FR)

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Timing

• After about 2 years internal discussions the Commission proposal was adopted and published on 13th April 2011

• EU-Presidencies’ attitude:Hungary, Poland and Denmark will pick it up (25th May, 7th June, 2 meetings under Polish Presidency planned so far)Denmark wants to reach political agreement in I/2012Cyprus could then reach formal agreement in II/2012

• Target of COM: Entry into force on 1.1.2013• Or will it take again 5-6 years?• We should push the Council for an agreement by December 2012 at the

latest when the EU Budget will be decided. Then the adoption of the ETD could be a crucial bargaining chip.

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Evaluation of the new energy tax proposal

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Raising ACTUAL diesel tax levels 10% over petrol: great idea

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Inflation correction: great idea

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The big mistake:

keep bans on fuel tax for aviation, shipping, fisheries

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Our ambition: get agreement on an EU energy tax law that

• Gets rid of tax bans in aviation / maritime

• Taxes fuels on energy/carbon content

• Is a guarantee for steady increase in fuel taxes• Forces low-tax MS to move and hence • Makes it easier for high tax MS to move

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What we and you can do

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Show that

• Fuel taxes have gone down, in EU and in member states

• Still, situation would be much worse without EU minimum tax (job effects?)

• Cheap diesel and lack of inflation correction are key problems as fuel taxes — like other environmental taxes — are quantity-based which means:Their revenue is automatically devalued by inflation: In Germany since 2003 alone, by 0.07 Euro/ liter. This equals more than two steps of the 5x3Ct-increase of the ecotax)

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Elements of arguments and a strategy

• Show that• higher fuel taxes can save jobs• ’95 g/km’ can be met without 50% diesel cars

• High-tax countries: create support for EU reform • Low-tax countries: ‘shame’ strategy

(Southern/Eastern countries and Luxembourg!)• Negotiate the ETD as far as possible to come to

an adoption in December 2012 when the EU budget will have to be adopted and use it as bargaining chip of the netpayer members.

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Anything else we can still do?

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Background Material on environmentally harmful subsidies in D

GBG proposed the following elements for the austerity package• And the German Government kindly implemented 80% of our proposals• http://www.foes.de/themen/sparpaket/

Some studies on phasing out environmentally harmful subsidies (though most in German):• Nuclear power: http://www.foes.de/pdf/2010_FOES_Foerderungen_Atomenergie_1950-

2010.pdf• Hard Coal: http://www.foes.de/pdf/Kohlesubventionen_1950_2008.pdf• Comparison Nuclear and Coal:

http://www.foes.de/pdf/2010.10_FOES_Foerderungen_Strom_Atom_Kohle_Vergleich.pdf• In 2011 this comparison was complemented by the support given to renewable energies:

Hard coal 4.1 Ct/kWhNuclear 3.2 Ct/kWhRenewables 2.2 Ct/kWhBrown coal: 1.2 Ct/kWh

• Overview of environmentally harmful subsidies in Germany:• http://www.greenpeace.de/fileadmin/gpd/user_upload/themen/energie/

Greenpeace_Subventionsstudie_final.pdf

• Study on Company Car Taxation (including a joint EU-COM/GBE/EEB-event on 28.02.2011 launching this and an EU-wide comparative study): http://files.foes.de/de/downloads/studien/FiwaDiwaRef-Fassung2.0.pdf

• ... And the study from the German Environment Protection Agency (UBA) on environmentally harmful subsidies which – surprise, surprise – comprises a lot of figures fromoiur above mentioned study: http://www.umweltbundesamt.de/uba-info-medien/4048.html

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Thank you for your attention!

Kai SchlegelmilchVice President ofGreen Budget Germany/Europe

Schwedenstraße 15a13357 BerlinGermanyTel: +49-30-7623991-30www.foes.deKai.Schlegelmilch@foes.de

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6. Conclusions

Environmental fiscal reforms (EFR) are a crucial policy to• make the market work for environmental protection• get a society on a low-carbon trajectory;• help develop new industries in the area of renewables and energy efficiency that will

provide sustainable jobs• provide competitive advantages for these industry;• contribute to restoring fiscal stability after the recession.

However:• It needs a long-term effort to change the tax and fiscal structure• Germany has not yet fully done its tasks, but at least it started and has taken major

steps and a cross-party consensus for such measures in general seems to be achieved.

But fiscal changes pay off as environment and fiscal policy benefit

This is well understood by countries in transition which are increasingly competitors:• Vietnam will introduce it in 2012, China is also introducing it between 2012-2015

In addition: Australia announced a carbon tax as well for 2012

Concluding: Europe needs to keep up a high level of ambition by providing strong incentives, i.a. through energy and carbon taxation

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Vielen Dank für Ihre Aufmerksamkeit!

Thank you for your attention!

Kai SchlegelmilchVice President ofGreen Budget Germany/Europe

Schwedenstraße 15a13357 BerlinGermanyTel: +49-30-7623991-30www.foes.de, www.green-budget.euKai.Schlegelmilch@foes.de