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Making EU tax policy work for the environment, not against it

26/09/2019

What happens when environmental policy goes in one direction but energy tax policy goes in the other? A lack of progress in the fight against climate change. That’s what two new reports have shown by highlighting the counterproductive nature of energy taxation in the EU and around the world.

A study from the OECD underlines the importance of shifting tax incentives from those that favour “polluting fuels” to those that encourage renewables. “Taxes on road fuel are relatively high yet rarely fully reflect the cost of environmental harm, especially with some road transport sectors offered preferential rates,” the OECD states.

The European Commission’s new assessment of its Energy Taxation Directive finds that current tax rules “do not contribute to the new EU regulatory framework and policy objectives in the area of climate and energy, where technology, national tax rates and energy markets have all evolved considerably over the past 15 years.”

Translation: Current tax policy gives favourable treatment to fossil fuels due to the lower energy content of renewable fuels, and goes against Europe’s commitment to phase out fossil fuel subsidies.

As the Commission has pointed out, for example, “no link exists between the minimum tax rates of fuels and their energy content and CO2 emissions.”

The case of ethanol is especially egregious. Ethanol is the highest-taxed transport fuel when calculated on an energy content basis. Every gramme of CO2 emitted from ethanol is taxed almost five times more than CO2 emitted from petrol on a CO2 equivalent basis.

Renewable EU ethanol delivers more than 71% greenhouse-gas emissions savings compared to fossil fuel, and under the right policies could be upscaled across the EU in today’s cars and infrastructure. That would help Member States meet their renewables targets and move the EU closer to its climate commitments.

As the OECD report states, “Adjusting taxes, along with state subsidies and investment, is vital to encourage a shift to low-carbon energy, transport, industry and agriculture.”

The Commission has tried before to update the Energy Taxation Directive but was unable to get unanimity among Member States. Now it has reprioritised fixing the Directive.

What would success look like? The EU should encourage tax policies that reward emissions reduction by:

  • removing tax exemptions for fossil fuels, in particular diesel
  • taxing transport fuels on energy content
  • taking into account fuels' carbon intensity

It’s clear the time is right to make fossil-friendly tax policy a thing of the past.