Britain set to veto EU carbon tax plans

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The British government is "highly likely" to block European Commission proposals for a carbon tax contained in a widely-circulated draft version of the Energy Taxation Directive, EU diplomatic sources said yesterday (12 April).

"Without saying that we will definitely kill this thing before it is born, I think it is highly likely that we will block it," a diplomat from one member state told EURACTIV. 

The draft directive, seen by EURACTIV and expected to be presented today, proposes separate carbon dioxide and consumption taxes on fuel to advance the EU's climate goals for 2020. 

It would oblige member states to set minimum rates of CO2 taxes at €20 per tonne for fuel used for purposes of transport and heating, from 2013.

The tax would be automatically linked to inflation – measured every third year – and it would compel member states to institute 'fuel-neutral' taxation from 2020, ensuring higher taxes for energy-intensive fuel such as coal and diesel. 

A litre of diesel would be taxed at 8% more than a litre of petrol under the proposals, to deter the use of gas-guzzling SUVs and pick-up trucks.

Last push to postpone entry into force

This would also entail changes to national legislation across the European Union. EURACTIV understands that as late as yesterday night (12 April), several commissioners were pushing for the proposal to be postponed until 2023.

Less contentiously, electricity companies and other firms that are currently trading carbon in the Emissions Trading Scheme would not be affected by the directive.

"Our objective is less about introducing a new tax than about restructuring energy taxation so as to meet the EU's high priority goals of climate change, energy efficiency and fair competition," said Algirdas Šemeta, the bloc's commissioner for taxation.

As such, environmental groups have broadly welcomed the initiative. But under the voting rules that apply to taxation proposals, opposition from any one EU state could kill it. 

"It is a unanimity dossier and we're not going to support new measures in this area," the EU diplomat said.

"Taking into account the opposition of other states as well, it is certainly one we would oppose and that therefore points you towards what we might do in the Council."

The motor lobby in Britain has responded angrily to news of the proposed tax, with the Automobile Association describing it as "madness" at a time of rising prices.

But a new report released today by the environmental think-tank Transport and Environment claims that fuel prices have declined by 10 cents per litre in real terms since 1999.

If the taxes had been inflation-corrected and revenues had been used to cut labour taxes instead, the report says that 350,000 jobs could have been saved, oil imports would have been cut by €11 billion and road transport CO2 emissions would have been 6% lower.

The current Energy Taxation Directive was adopted by the European Commission in October 2003 with a string of exemptions and phase-in periods.

It defines minimum taxation levels for all traded energy products – such as petrol, diesel and kerosene used for transport, heating and electricity.

But it excludes international aviation and shipping. 

Even so, many of its measures have been embraced by environmentalists. Dutch Green MEP Bas Eickhout told EURACTIV that the directive was a logical and "very crucial" initiative.

"My message to countries thinking about using a veto," he said, "is that if you are going to block even this modest proposal – after all your talk about the 'polluter pays' principle being a key driver for EU legislation – then its clear that your principles were never anything more than rhetoric".

"This is the moment of truth," he added.

UK MEP Jacqueline Foster, the Conservative transport spokesperson in the European Parliament, said: "The European Union will do nothing to improve its popularity by imposing tax increases on already sky-high motoring costs. We all want to reduce CO2 emissions from vehicles but it should be done by placing incentives on people, not by clobbering them. I regret that this tax hike could increase the cost of other forms of transport such as flights and ferries."

"With so many goods transported by road," she continued, "further increases in fuel costs will send inflation soaring. The knock-on effects for our economy could be significant. The UK government is right to suggest it will use its veto on these measures. There is a real detachment between the Commission's laudable policy goals and the reality of people's everyday lives, where petrol and diesel costs are reaching crippling levels".

Dutch Green MEP Bas Eickhout told EURACTIV that the directive was "absolutely a step that needs to be taken. We know it always difficult talking about taxation since there are 27 vetos but it is very crucial that we start accounting for the costs of gas or diesel. We have to make sure that the taxation isn't working in that direction - and that the polluters start paying. So we welcome this initiative but of course we are critical that aviation is not included and because there are some other exemptions".

On the price selected for the fuel tax, he noted that "if you're talking about the price level for carbon, you have to be close to what is expected in the Emissions Trading Scheme sectors, so that the sectors are more in line. The Commission is working towards that and it sounds very logical to me. But you can already see the sensitivity. The first German response was that this involved too much rules-setting from the European level".

"Come on guys! Making diesel more expensive is just how environmental costs have to be accounted for. It makes sense. It is just a simple way to ensure that the polluter pays principle is applied according to the environmental burden," he added.

On the other hand, Geoff Dunning, chief executive of Britain's Road Haulage Association, was reported as complaining that "the price of fuel has already gone through the roof. To add to that would be madness. It would cripple the British economy. People would stop going out shopping. The cost of moving things would go through the roof. Everything we buy in the UK is transported by truck with very few exceptions so everything will have to cost around 25% more. It will send inflation soaring".

"We broadly welcome this directive," Jos Dings, director of environmental think-tank Transport & Environment, told EURACTIV. "On the road transport side the Commission gets it broadly right by rationalising the way we tax fuels and – in the widely-distributed draft – getting rid of an implicit diesel subsidy which has caused us to use way too much diesel compared to petrol."

"On the air and maritime transport side, it is very disappointing that the Commission has not had the guts to end the prohibition on fuel taxation in those sectors. So we will have a fairly rational approach to road transportation and a completely irrational approach to maritime and aviation," he said.

Dings also had reservations about the directive's treatment of biofuels. "The Commission has also said that biofuels would be completely exempt from CO2 taxation," he said, "but in reality biofuels are not zero carbon. Their performance varies widely and we would like to see their taxes reflect their actual performance and not by default a zero rating. That's another mistake we think should be corrected."

Rob Vierhout, secretary-general of the European Renewable Ethanol Association (ePURE) was more upbeat. "Finally, the paradox of clean renewable fuels being taxed at a higher rate than polluting fossil fuels would be solved," he said. "This is an absolutely necessary move to cement the EU's Climate and Energy objectives and to level the playing field between renewable fuels and fossil fuels. The polluter must pay and must pay a fair share. ePURE urges the member states to swiftly adopt the Commission proposal and thereby truly complete the EU Climate and Energy Package to which they committed themselves two years ago."

The Socialists & Democrats (S&D) group in the European Parliament described the updated text as a progressive revision of an outdated directive. "The S&D has been calling for an EU carbon tax for a long time and this is an opportunity to adapt EU tax policy to our energy and climate goals," said S&D group vice-president Marita Ulvskog. "A mandatory CO2 tax sends a strong signal to the world that the EU is serious about cutting emissions. It also shows industry that we stand behind investment in cleaner and more efficient technologies that will generate new green jobs," the Swedish MEP said.

The great challenge now was to make sure that the directive was passed without more loopholes, so that industry could make green investments with security, she added. "Member states must ensure that increased energy and carbon taxes do not hit ordinary citizens. This can only be done through social measures and a focus on energy efficiency. Slashing social spending, as right-wing governments are doing, is not helping to create a sustainable and fair society," she said.

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA) was less welcoming. "From a tax and economics perspective, ACCA does not believe that, in these times of austerity coupled with energy cost peaks, a pan-European carbon tax would benefit a large number of companies already seriously hit by financial pressure. If we are not hostile to the idea of step-by-step going in the direction of an energy and carbon tax, we urge EU decision-makers to carefully take into account the way they want to introduce the measures, which will most adversely affect many member states".

A counter-view was taken by EUROPIA, the European Petroleum Industry Association. "It is important to balance taxation for all energy sources to create a level playing field and technology neutral approach for all energy products," said EUROPIA Secretary-General Isabelle Muller. "Taxing each energy product on its merits – its energy content and CO2 emitted while used, will encourage intelligent choices of energy products based on their efficiency rather than on their favourable taxation."

But the group recognised problems ahead. "This will not be an easy process as it will require unanimous member-state support and it will impact many stakeholders," Muller commented. "Due consideration should be given to these potential impacts and the transition should be managed over time. However, it is the right time to start the process to deliver the right long term signals to all industrial players and consumers."

Philippe de Buck, of the influential association of European confederation of industries, BusinessEurope, wrote a letter to Commissioner Semeta outlining his organisation's priorities.

He said: "The revision of the ETD (Energy Taxation Directive) provides for a common energy tax based on the energy content of fuels, which will require important changes in the level of taxation of different sources in most member states. It is important that the impact on all businesses and business sectors and the linkages with other policies are assessed in formulating the final form of the directive and that the transitional periods reflect normal product cycles."

"We will continue to engage in a constructive dialogue with the European Commission and with member states to ensure that the specificities of this legislation will not hamper competitiveness for businesses while meeting wider climate policy objectives," he added.

However, the European Biomass Association (AEBIOM) welcomed the Commission's new initiative with alacrity. A statement put out by the group said: "AEBIOM considers that the revision of this directive is a first step towards the 'polluter pays' principle that provides a good opportunity to increase the CO2 taxation in the future. The minimum level of CO2 taxation presented today, if implemented, would improve the competitiveness of bioenergy in the EU."

"At present, there are still only a few EU countries such as Sweden, Finland, Ireland and Denmark that have a CO2 tax. The Swedish CO2 tax, for example, is around 95 euros per tonne of CO2, which is almost five times more than the proposed minimum level (20 euros per tonne) in the revision of the directive," the statement continued. 

The Energy Taxation Directive entered into force on 1 January 2004 but was amended that same month to allow new member states to temporarily grant exemptions for energy taxes or apply lower rates than the minimum rates required by the directive.

A sudden rise of excise duties in the new EU states was thought likely to have had a detrimental impact on their economies and constitute a heavy burden for small companies and poorer households.

The Energy Taxation Directive was formally adopted on 27 October 2003 after six years of discussion. Its aim was to create an EU-wide system for the taxation of all energy products. The most contentious issues concerned the taxation of energy-intensive businesses and the arrangements for the use of diesel oil. Phase-in periods were granted in several areas.

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