The European Commission (the “EC”) proposal (the “Proposal”) for a Council Directive amending Directive 2003/96/EC and restructuring the Community framework for the taxation of energy products and electricity (the “Energy Taxation Directive”) is facing hard times due to lack of consensus amongst the Member States. Preliminary work presented last week by the European Parliament (the “EP”) shows the EP is joining the battle on key but very specific aspects of the Proposal, mainly the one that could affect motor fuel taxation.

I. The Reshaping of the Energy Taxati on Directive - Reminder

The Proposal presented in April of this year represented an attempt by the EC to tackle at the same time the generation of revenues, energy savings, and environmental considerations of the EU climate and energy package. The Proposal suggested a change in paradigm with the introduction of an explicit distinction between energy taxation specifically linked to CO2 emission attributable to the consumption of the products concerned (“CO2- Related Taxation”) and energy taxation based on the energy content of the products (“General Energy Consumption Taxation”).

CO2-Related Taxation should tackle all sectors not covered by the European Trading Scheme (the “ETS”) with the introduction of a single minimum rate for CO2 emissions (EUR 20/t CO2), whilst General Energy Consumption Taxation would lead to the introduction of minimum tax rates based on the energy content (EUR/GJ) rather than the existing mechanisms based on volume. Indeed, General Energy Consumption Taxation mainly aimed to remove distortions for competing energy sources by taxing energy sources on the basis of the amount of energy that they generate. For motor fuels, the minimum level of taxation under the Proposal was fixed at EUR 9,6 per Gigajoule, which corresponds to the current minimum rate applicable for petrol minus the corresponding CO2 component.

Precedent coverage of the Proposal

II. The Debate and EP ’s contri buti on to it

Some of the EU Member States have already advocated against the Proposal, using procedural arguments such as a lack of legal basis or the possible lack of compliance with the subsidiarity principle.

The EP follows a different path, tackling the absence of proportionality of the changes contemplated by the Proposal for motor fuel (and, in particular, diesel) taxation. The draft resolution presented to the Parliament’s economic and monetary affairs committee on 7 November mainly identified the three following items:

  • Increasing the level of taxation of diesel may cause a major destabilising blow to the European automotive sector, which enjoys a competitive advantage with regard to diesel technologies. The EP recommends increasing the transition period to more than the current 10 years provided by the Proposal;
  • The Proposal represents a significant intervention by the EU in national fiscal policies with the determination of tax rates applicable (compared to threshold levels in the current directive). The EP proposes to curb the tax increase for LPG and other alternative fuels to enjoy a comparative advantage necessary for the development of fuel-efficient technology; and
  • Any significant increase in energy prices might lead to inflation and, given the current shape of many Member States’ public finance, it will be difficult for Member States to balance the effect with other measures such as cuts of other tax rates. The EP strongly opposes the Proposal system for automatic increase of the minimum rates of taxation to follow price index or CO2 price movements.

III. Next steps

EP’s views are only further evidence of the absence of consensus in the matter. Reports of discussions held at the Council Working Party on tax questions strongly suggests that the Proposal as it stands is unlikely to move forward. The Proposal requires unanimity at Council level for its approbation and, for the Proposal to move ahead, substantial changes will likely have to be introduced.

The future of the Proposal is so sensitive that even the proposed orientation note prepared by the Polish presidency for endorsement by the ECOFIN meeting held on 8 November was not even discussed, the item being removed from the agenda at the last minute.