Europe has a choice between getting a good taxation directive this year or waiting years for something not yet defined that may never win agreement. For the sake of climate progress, it should take its chances with what it has now, writes Jim Power.
Jim Power was the chief economist at Bank of Ireland and treasury economist at Allied Irish Banks. He teaches economics at The Smurfit Graduate Business School, University College Dublin, and advises on economic policy.
Much has changed in the diesel and petrol sectors since 2003.
Petrol got much better after poisonous leaded petrol finally vanished from Europe that year. The USA even went so far as to scrub leaded petrol regulation from its statute books given there was no need to regulate something that no longer existed.
Diesel got worse, with ‘dieselgate’ and the dual realisations that many diesel cars couldn’t meet emissions standards without the aid of illegal defeat devices and nor were they reducing greenhouse gas emissions as policymakers had forecast they might.
Use of petrol and diesel rose 28% between 2003 and 2018, and so did their associated greenhouse gas emissions. Demand for diesel in Europe grew from parity with petrol in 2003 to three times petrol volumes today.
On the climate side of things, 2003 was Europe’s hottest summer on record (until it was overtaken by five even hotter summers), the Kyoto Protocol on reducing emissions was signed in 2005 and the Paris Agreement followed a decade later.
But one thing that hasn’t changed since 2003 is Europe’s directive on the taxation of diesel and petrol. It takes no account of the situation today.
At the time of its adoption, the Energy Taxation Directive (ETD) arguably represented a positive contribution to the EU legislative framework, but it has subsequently remained unchanged, despite the fact that technologies, energy markets, the climate emergency and the EU legislative framework have evolved and changed significantly since its adoption.
The Energy Taxation Directive is so out of date that the very first item it gives direction on is leaded petrol, a fuel which hasn’t existed for two decades.
It goes on to tax petrol, for reasons now lost in the mists of time, at a rate which is 24% higher than for diesel.
Disastrously for climate action, it taxes renewable and alternative fuels on the same volume basis as the diesel and petrol they are intended to substitute. In actual energy terms, this translates into massive penalties for renewables.
In the case of renewable bioethanol for example, which is currently Europe’s largest commercial-scale alternative to fossil-derived transport fuel, the tax burden on it is nearly double that of diesel. This simply does not make sense.
Worst of all, it contains no provision for the taxation of CO2 to complement the carbon price signal established by the Emissions Trading Scheme.
Europe’s legislators have long known that the directive is deeply flawed and inadequate.
In 2014 they had a new text agreed which sought to address and remedy the problems. However, Frans Timmermans, who was First Vice-President for Better Regulation at the time, withdrew it, fearing that even mild political opposition could hold it up indefinitely while causing a drain on institutional time.
This was a mistake. It should be clear to all at this stage that climate change is now correctly recognised as the greatest challenge facing the human race as extreme weather events are increasingly becoming more frequent and more extreme.
The crisis that Climate Change is rapidly becoming requires a very strong and very immediate response from policymakers and all stakeholders. It is clear that the scale and complexity of the problem requires a coordinated approach at both the national and international level.
The legislative framework needs to be fit for purpose. The reality is that it currently is not, but this can and should be remedied.
The new European Commission has set six priorities for the session that has just commenced, and number one on the list is sensibly and predictably, a European Green Deal. Ursula von der Leyen has put the Energy Taxation Directive back on the table as part of the Green Deal. It is imperative in the name of climate progress, to try once more to get the revised version passed.
She should ask Mr Timmermans, who is back as her Green Deal and Climate Law Commissioner, to waste no time and put it to a vote this year. Attempts to rewrite the Directive again, despite the fact that a very good text was agreed in 2014, or to apply a different voting process, or to add in aviation energy, are all measures which will guarantee many more years of delay and failure.
If it is worth doing it should be done now. Time is running out.
COVID-19 poses a significant immediate threat to the EU and global economies, but climate change still represents an even more fundamental near-team, medium-term and long-term threat to our world.