EN32 Energy taxes

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Although energy taxes are a traditional source of government income, they are also one of the ways in which external costs can be internalised into final energy prices and hence the level of energy taxes can be seen as a response indicator. An increase in the tax that raises the final energy price for a fuel may encourage lower use of that fuel. Changes in relative tax levels between substitutable products may also change relative prices and be used to encourage environmentally preferable fuel switching.

Between 1991 and 2006, implicit tax rates for electricity, natural gas and transport fuels in the EU-15 increased when expressed in constant prices, i.e. excluding the effect of inflation. Particularly large percentage increases were seen in the tax applied to natural gas in industry (although from a low starting point), and the tax on unleaded gasoline for road transport also rose significantly, partly as it was taxed at a lower rate than leaded gasoline when originally introduced to encourage uptake. Whereas much of the tax increases for gas and electricity purchased by industry have been seen after 2000, for road transport fuels taxes increased substantially in the 1990s but since 2000 have either levelled off or fallen slightly. In the case of households, taxes have followed a mostly rising trend over the entire period from 1991 to 2006. Overall, although energy taxes increased substantially, the increase was not sufficiently high to increase the end-user prices significantly for fuels other than road transport fuels (see EN31).

There is much less time series data available from Eurostat on tax rates in the new Member States than for the EU-15. However, the available information indicates that tax rates on energy are lower (at market exchange rates) than in the EU-15 across all sectors. While this situation is expected to change over time, an amendment to the Directive on restructuring the Community framework for the taxation of energy products and electricity allows most new Member States temporarily to apply excise duty exemptions or lower rates of duty than set in the Directive.

The proportion of tax in final energy prices increased between 1991 and 2005/6 for all fuels in the EU-15. Member States are increasingly looking towards environmental taxes to raise prices and to encourage consumers to reduce demand and thus reduce the environmental impacts of energy use. However, it is difficult to define the optimal levels of tax required to meet multiple energy policy objectives: ensuring security of supply; affordable energy; and reducing environmental impacts. Member States have therefore tended to set taxes and adjust levels based on their own experience of fiscal needs and environmental effectiveness. Evidence of effective energy taxation policies is limited at present, but positive environmental results have been produced from the Danish, Finnish and Swedish CO2 taxes and the United Kingdom fuel duty escalator (EEA, 2000). In Finland, differentiated excise tax on motor fuels accounted for a 10-15 % reduction in CO and hydrocarbon emissions from car traffic (European Commission, 2000) and in Denmark, industry reduced its CO2 intensity by 25 % in seven years from 1993-2000; analysis have shown that at least 10 percentage points resulted from the CO2 tax (EEA, 2005). The sale of petrol (and to a lesser extent diesel) decreased in Germany between 1998 and 2001, while the energy tax levied for petrol and diesel increased over that period, respectively (EEA, 2005).

The European Commission believes that energy taxation is a flexible and effective instrument for encouraging consumers to change their behaviour. In its Green Paper, 'Towards a European Strategy for the Security of Energy Supply' (COM(2000) 769 final) the Commission urged the Council to reconsider the energy products 1997 taxation proposal, and states that it will continue to consider other specific taxation measures. A revised version of the energy products Directive entered into force on 1 January 2004. More recently, the Green Paper on energy efficiency (COM(2005)265 final) highlights the need to improve taxation, to ensure that the polluter really pays, but without increasing overall tax levels. It suggests that one option would be to bring excise rates on energy products and electricity consumed in production activities closer together, but at the higher end of the scale, and introduces automatic indexing of all excise rates in order to avoid erosion by inflation.

Road transport fuels

Implicit tax rates for diesel increased by 27 % between 1991 and 2005 in the EU-15, and for gasoline by 44 % between 1991 and 2005. This reflects the trend in Member States to increase taxes on transport fuels in order to limit emissions of CO2 and other pollutants from transport, as well as for revenue raising purposes. When unleaded gasoline was first introduced widely in 1991, a relatively low tax rate was applied to encourage rapid market penetration and the replacement of leaded gasoline (which has now largely been phased out). This tax break was progressively removed as gasoline consumption switched to unleaded gasoline.

Transport fuel tax rates vary considerably across the EU, with the UK, Germany and France having the highest rates on both gasoline and diesel (see Fig. 4). Greece and Malta show the lowest rates. Between 1999 and 2005, taxes on petrol and diesel in Germany rose by around 30 % and 50% respectively, which was by far the largest increase in this period in any Member State and was the result of the 1999-2003 environmental tax reform programme. It is of interest to note that according to Eurostat's energy balances final energy consumption in road transport in Germany fell by about 8% between 1999 and 2004, whereas, on average, it increased by 5 % in the EU-15.

Tax rates in the new Member States are typically lower, although some of the new EU Member States have significantly increased tax rates, particularly on transport fuels, during recent years (EEA, 2005). However, a number of these countries will have to increase taxes further to meet the minimum levels set in Directive 2003/96/EC, from which they have a temporary derogation.

Industry

The proportion of energy taxes in final energy prices, is generally low for industry compared with household users. This reflects concerns for industrial competitiveness. Voluntary agreements and the provision of tax reductions for energy intensive industries are common throughout all Member States. For example the Danish CO2 tax system offers significantly reduced tax rates to firms that agree to energy conservation measures. Industrial energy taxes showed different trends depending on the fuel. Taxes applied to natural gas prices increased steadily from the early 1990s onwards and by 2006 were more than double 1991 levels. In contrast electricity taxes saw a declining trend from 1991 to 1996, after which they started rising again and so by 2006 were about 46 % above 1991 levels.

Households

Energy taxes for EU-15 households increased over the period 1991-2006. Taxes on natural gas increased by 29.1 % and electricity taxes rose by 36.8 %. In the case of electricity, these tax increases partly counteracted the decrease in electricity prices brought about by the liberalisation of energy markets. As a consequence, the proportion of tax in final electricity prices increased by half over this period. The highest recent tax increases on electricity have been seen in the Netherlands, where taxes have increased by more than 5-fold between 1996 and 2006. In contrast, taxes in the United Kingdom fell by over 40 % over the same period (due to a reduction in the rate of VAT rate and falling pre-tax prices). Electricity consumption in the Netherlands actually increased more than in the UK between 1996 and 2004. However, relative to the period 1990-99 electricity consumption in Dutch households slowed down quite significantly, from 2.9% per annum in the first period up to 1999 to 1.9% per annum in the second period from 1999. In the UK, the reverse was true, with the first period (1990-99) growing at a faster rate, 1.8% per annum, than the second period (1999-2004), at 0.9% per annum. This seems to be consistent with the evolution of taxes in both countries.

In the new Member States, significant rises in implicit tax rates have been seen in the household sector largely as a result of increases in value added tax. The Czech Republic, Poland and Slovakia all saw increases in the rate of VAT on electricity between 1995 and 2001. In contrast, any tax increases on fuels used by industry have been more modest.