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The European Commission is proposing a new kind of energy tax to be made applicable across the EU.  The scheme seeks to tax transportation and heating fuels based upon their Btu content and CO2 emissions rather than volume sold.  One argument for this change in approach is that more energy efficient vehicles and growing public transport use is reducing the volume of fuels sold and thus tax revenue to support road repairs and other purposes.  That is an argument we have heard here in the US as well.  But the real practical result of this “reform” would be to make carbon taxes applicable universally even to those sectors currently exempt from the EU Emissions trading Scheme including transportation, agriculture, services and individual households.  By changing the formula from volume to energy content and CO2 release, the EU Commission believes it gets to the heart of the emissions reduction purpose of carbon taxes.

The EU proposal would phase in the energy content tax on transport fuels of €9.6/GJ by 2018, and heating fuels at €0.15/GJ from 2013. The CO2 tax component would be €20 per tonne from 2013 for all fuels to be harmonized with the carbon price in the EU ETS.  The proposal also calls for the tax rates to be reviewed and revised based upon inflation every three years.

The EU Commission is betting that member states want new sources of revenue more than they want an acrimonious fight over this proposal especially when the Commission adds in the bonus arguments of green jobs creation and achieving the 20% emission reduction targets by 2020 they committed to reach.

The question is whether this seduction will prove irresistible.

There are several awkward questions ahead—-an EU Commission decision to implement this new energy tax regime must be unanimous. Will EU states accept one more intrusion by Brussels in their “domestic business” just when they feel most vulnerable to contagion from EU problems like Greece, Portugal, Ireland and Italy—the PIGS at the trough looking to be bailed out of their financial mess?

The other problem is the EU Parliament is completely cut out of participation in tax matters which gives the opponents an added bonus argument against what is portrayed as an overreaching EU Commission executive not accountable to the elected parliament.  It will make for good theatre.  The current energy directive adopted took six years to win approval so few are optimistic this major change will be accepted anytime soon.

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