EN32 Energy taxes

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The proportion of tax in final energy prices decreased for transport fuels and natural gas between 1995 and 2006/7 in the EU-15, whilst it increased for electricity, despite rising end-user prices for all fuels (see EN31). 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.

Changes in the share of taxation in energy prices are dependent on the form of taxation applied. For example, Value Added Tax (VAT) applied as a % of end-user prices ensures that the share remains unchanged, whilst the share of taxation from an excise duty applied per litre of fuel will decrease as the price of energy increases. Hence the decrease in the share of transport fuels has been driven primarily by an increasing global price for oil (see EN31) which has risen faster than any tax changes. For example, the fuel duty escalator in the UK, aimed at keeping fuel tax rising ahead of inflation to curb pollution and congestion, was stopped in 2000.

Details of specific tax rates for each Member State are contained in DG TAXUD's (2008) Taxes in Europe Database. For further details of transport fuels and prices see EEA transport indicator TERM21.

The proportion of energy taxes in final energy prices is generally lower for industry compared with household and transport 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.

The share of taxes in household electricity prices in 2007 varied across member states from a high of 55% in Denmark to 5 % in the case of Malta. The average for the EU-15 is 24%. Similarly, the share in gas prices ranges from 56 % (in Denmark) to 5 % (in the UK) with an EU-15 average of 22 %. The wider differences in taxation in this sector tend to reflect different priorities. Whilst most taxation in the household sector provides some revenue raising, high taxes in Denmark are part of deliberate policy to encourage energy efficiency (following from the earlier oil crises in 1973 and 1979). By contrast, the rate of VAT in the United Kingdom is set at a much lower level as the emphasis is primarily on affordable supplies of energy for all consumers, particularly those with lower incomes.

Tax rates in the new Member States are typically lower, although many have significantly increased tax rates, particularly on transport fuels, during recent years (EEA, 2005). In addition, rises have occurred due to the expiration of a number of temporary derogations from the minimum levels set in the Energy Taxation Directive 2003/96/EC (see COM/2006/0342 final).

The share of 'environmental' taxes in total tax revenue varied significantly across EU member states in 2005, from around 11.6 % in Denmark to 5.2 % in Belgium. However, the average share for the EU-15 decreased from 6.9% to 6.4%, with the share of energy taxes (excluding transport) dropping from 5.3% to 4.7%. The change in the percentage of taxation also varied considerably over the period 1995 to 2005, with six member states increasing their share by more than 25%, whilst more than nine member states reduced their share by over 10%. The share of taxes applied directly to pollution/resources is much smaller, with the exception of Denmark and the Netherlands where it accounted for around 2.6% and 1.6% of total revenue, respectively, in 2005.

A number of countries (such as Slovakia, Estonia, Latvia, Poland and Lithuania) have seen increases in the share of 'environmental taxes' in total tax revenue of over 50% from 1995 to 2005. This has been driven largely by an increase in energy taxes (via a combination of broadening the tax base, increasing existing taxes and introducing new taxes). Whilst growth in taxes on pollution/resources has been more rapid in a number of cases this has been from a very low base. A notable exception is Denmark where the share of pollution/resource taxes in total revenue increased from 0.7% in 1995 to 2.6% in 2005 from the introduction of excise duty on a number of polluting substances (such as nitrogen or certain pesticides).

The use of environmental taxes is linked to the issue of Environmental Tax Reform (ETR). This aims to shift the tax burden from welfare-negative taxes (e.g. on labour) to welfare-positive taxes (e.g. on environmentally damaging activities, such as resource use or pollution) as this can lead to a win-win in terms of addressing both environmental and employment issues (European Commission, 2007). Analysis of 6 countries (Denmark, Netherlands, UK, Sweden, Finland, Germany) that implemented ETR (in relation to energy/CO₂ taxes) over the period up to 2004 indicated a reduction in greenhouse gas emissions of around 2-6% (COMETR, 2007).