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News in Brief, BB200705

EU opens energy tax debate: how to fight climate change with taxes?

04.05.2007

Following closely the commitment by the EU27 at the last European Council to make cuts to greenhouse gas emissions and achieve a binding 20% target for renewable energy by 2020 (see Brussels Briefing April 2007), on 28 March 2007, the European Commission released a Green Paper on market-based instruments for environment and energy-related purposes.

The Green Paper is a joint initiative by Commissioners Stavros Dimas for Environment and Lászlo Kovács for Taxation and Customs. In launching the Green Paper, the European Commission intends to open a public debate on how taxes, tradable emissions rights and other market-based instruments can be used more widely and effectively for environmental and energy policy purposes at community and national level. The reactions to the Green Paper will provide input for the upcoming review of the Energy Taxation Directive.

Encouraging market-based instruments

In the Green Paper, the European Commission notes that well chosen and correctly thought out market-based instruments, such as quotas, tariffs and taxes, present certain advantages over regulation and administrative approaches. By influencing prices (via taxes, charges or tax incentives), or setting quantities (emissions trading), these instruments offer a flexibility that can appreciably reduce the costs of measures to support the environment.

The Green Paper also asks whether the EU should promote environmental tax reform directly at national level by shifting taxes from income to environmentally damaging products and services. The Commission is therefore sounding out interested parties on the idea of creating a new forum that could encourage exchanges of experience and best practices between Member States on the use of market-based instruments and the coordination of national approaches, as well as national experiences with Environmental Tax Reforms.

While recognising the existence of “numerous subsidies that are not only ineffective from an economic and social standpoint, but can also be harmful to the environment and human health,” the Commission’s paper solicits from stakeholders the best ways to advance the process of reforming these environmentally harmful subsidies.

Developing the Energy Taxation Directive

One of the major proposals in the Green Paper is the introduction of an ‘explicit’ environmental element in the energy tax directive. The European Commission proposes a tax differentiation between energy and environmental elements. There should, therefore, be a fuel taxation in terms of ‘energy content,’ and at the same time, this fuel taxation should take into account the environmental aspects of energy (by differentiating between greenhouse gases and emissions from other gases). In addition, the Commission notes that with the revision of the energy taxation directive, it would also be advisable to guarantee consistency with the EU emissions trading scheme.

According to Commissioner Kovacs, this tax differentiation would indirectly favour cleaner energy sources, especially renewable energy, and it would push producers and consumers away from non-environmentally friendly goods.

In EWEA’s view, the European Commission rightly points out that taxation should be used to internalise the damage caused by different energy options, according to their environmental impact. However, given Member State reluctance to cooperate on taxes and the difficulty in obtaining a unanimous agreement at European level, in the short term, one cannot rely solely on these market-based instruments. Existing support schemes for renewable energy sources, either in the form of green certificates, tenders, tariffs or tax rebates, constitute a second best option that helps to correct market prices.

Next Steps

The European Commission is inviting reaction to the Green Paper from other EU institutions, Member States, all stakeholders and the public. Replies to the consultation should be sent to: [email protected] before 31 July, 2007.

 

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