Energy Taxation Directive Revision

Introduction and Overview

The Energy Taxation Directive (ETD) Revision is a proposal by the European Commission to recast the existing directive from 2003 (Directive 2003/96/EC). It is a key component of the 'Fit for 55' package, which aims to align EU legislation with the European Green Deal's objective of reducing net greenhouse gas emissions by at least 55% by 2030 and achieving climate neutrality by 2050. The proposal seeks to modernize the rules for taxing energy products and electricity, ensuring they contribute to the EU's climate and environmental goals by sending the right price signals to consumers and businesses.

Evolution and Relation to Other Laws

The original ETD (2003/96/EC) is considered outdated and no longer aligned with the EU's current climate ambitions. Its volume-based taxation, low minimum rates, and numerous exemptions are seen as de facto incentives for fossil fuels.

This revision is designed to work in concert with other 'Fit for 55' initiatives, most notably the revision of the EU Emissions Trading System (ETS). While the ETS applies carbon pricing to certain sectors, the revised ETD will complement it by setting a harmonized tax framework for fuels and electricity, particularly in sectors like road transport and buildings, thereby avoiding overlaps and ensuring policy coherence. It also relates to the Renewable Energy Directive (RED) and the Alternative Fuels Infrastructure Regulation (AFIR) by creating tax incentives for the uptake of renewable and low-carbon fuels and electricity.

Main Goals and Objectives

The primary objectives of the proposed revision are:

• Align with Climate Goals: Restructure energy taxation to support the EU's 2030 and 2050 climate targets by incentivizing sustainable practices.
• Promote Clean Energy: Encourage the shift from fossil fuels to cleaner alternatives, including renewable electricity, sustainable biofuels, and renewable hydrogen, by taxing them at lower rates.
• End Fossil Fuel Subsidies: Eliminate outdated exemptions and reductions that currently benefit fossil fuels, particularly in the aviation and maritime sectors.
• Improve Internal Market Functioning: Update and harmonize the structure of tax rates to reduce distortions of competition and create a level playing field across the EU.
• Preserve Revenue Capacity: Provide a stable framework that allows Member States to generate tax revenues while supporting the green transition.

Who It Applies To

The directive is addressed to EU Member States, which are required to transpose its rules into their national tax legislation. It directly and indirectly affects a wide range of actors, including:

• Businesses: Across all sectors, but especially in energy-intensive industries, transportation (aviation, maritime, road, rail), agriculture, and forestry.
• Energy Producers and Suppliers: Including producers of electricity, fossil fuels, biofuels, and other alternative fuels.
• Consumers: Households will be affected by changes in the taxation of heating fuels and electricity.

Key Dates and Timeline

• Proposed: July 14, 2021
• Proposed Application Date: January 1, 2023
• Transitional Periods: The proposal includes a 10-year transitional period, from 2023 to 2033, for the gradual phasing in of new minimum tax rates for certain fuels and sectors, such as aviation, maritime transport, and heating fuels for households.

Exemptions

The proposal significantly curtails existing exemptions but introduces new, targeted ones:

• Aviation and Maritime: The mandatory tax exemption for fuel used in intra-EU flights and waterborne navigation will be removed. A 10-year transitional period with gradually increasing rates is proposed. Sustainable aviation fuels (SAFs), other sustainable alternative fuels, and electricity will benefit from a zero minimum tax rate for 10 years to encourage their uptake.
• Cargo-only Flights: The exemption for fuel used by cargo-only flights is proposed to remain.
• Vulnerable Households: Member States may fully exempt vulnerable households from taxation on heating fuels for a period of up to ten years.
• Renewable Energy: The possibility to exempt or apply reduced rates to electricity from renewable sources (solar, wind, etc.) and advanced sustainable biofuels is maintained.

Key Provisions and Requirements

• Taxation Based on Energy Content: The tax base will shift from volume (per litre) to energy content (per Gigajoule - GJ). This provides a more accurate comparison between different fuels and benefits energy-efficient fuels like biofuels.
• Ranking of Rates by Environmental Performance: A new structure for minimum tax rates is introduced, ranking fuels based on their environmental impact. Conventional fossil fuels (e.g., petrol, gas oil) will be taxed at the highest rate, while renewable fuels of non-biological origin and advanced biofuels will have the lowest rates.
• Annual Indexation: Minimum tax rates will be automatically adjusted annually based on the EU-wide harmonised index of consumer prices (excluding energy and unprocessed food) to preserve their real value.
• Broader Scope: The list of taxable energy products is updated to include new fuels like hydrogen.

Obligations for Affected Parties

• Member States: Must transpose the directive into national law, apply the new minimum tax rates and rate structure, remove prohibited exemptions, and report applied tax levels to the Commission.
• Businesses (Fuel Suppliers): Will be responsible for collecting the new taxes, for example, on kerosene supplied at airports for intra-EU flights.
• Businesses (Consumers of Energy): Must comply with the new tax regime. Energy-intensive businesses may be eligible for tax reductions if they invest in energy efficiency or enter into agreements to achieve environmental objectives.

Affected Products/Actors/Processes

• Products: All energy products (petrol, diesel, kerosene, natural gas, LPG, coal, etc.) and electricity. Special attention is given to biofuels, biogas, hydrogen (fossil-based, low-carbon, and renewable), and synthetic fuels.
• Actors: Airlines, shipping companies, road hauliers, fishing vessels, energy-intensive industries, farmers, foresters, and households.
• Processes: The taxation of fuel for intra-EU air and sea transport, heating for residential and commercial buildings, and fuel for agricultural machinery.

Penalties and Enforcement

The proposal is a directive, meaning enforcement is the responsibility of individual Member States. They must establish national procedures to ensure the correct and straightforward application of the tax rules and to prevent any tax evasion, avoidance, or abuse. The directive itself does not specify penalties.