EU mulls carbon tax to curb global warming[fr][de] 

The proposed amendment of the 2003 Energy Taxation Directive would oblige member states to levy a CO2 tax on fuels in order to cut emissions.

The Commission reckons that the EU's policy framework has "changed radically" since the adoption of the existing legislation, which it wants to bring in line with the bloc's ambitious climate goals.

The proposal has been on the Commission's agenda since last year but it got stuck in internal consultation, sources told EurActiv.

The EU executive is now re-addressing the issue after the Swedish EU Presidency put its weight behind it. Moreover, it hopes that this could give the EU the leverage to secure an ambitious outcome at the UN climate talks in December.

The new CO2-related component is designed to complement a general tax on energy consumption, which allows member states to raise revenue. The extra dimension would create national CO2 taxes that could be set higher – but not lower – than the levels specified by the EU executive.

The draft suggests that a minimum levy of €0.01 per kilogramme of CO2 could be added to the price of heating fuels like gasoil, kerosene and natural gas. Motor fuels would be taxed either €0.01 or €0.03 per kg/CO2, depending on where they are used.

The EU executive reserves the right to propose higher rates in the event that the EU decides to up its emissions reduction target of 20% below 1990 levels by 2020.  The EU has pledged to go to 30% in the event that other industrialised countries follow suit in the framework of a new climate treaty to be negotiated in December.

Member states would have to apply the CO2 taxes starting from 2013, according to the draft document.

Tax to mainly address transport and agriculture

The Commission hopes that the reform will eliminate any overlaps with the EU's emissions trading scheme (EU ETS), which is the bloc's main instrument to tackle climate change. It consequently plans to extend the scope of the revamped Energy Taxation Directive to energy products that fall under the ETS but exempt them from CO2-related taxation.

The amended directive would address two significant polluting sectors, transport and agriculture, which were originally exempted from having to pay for their emissions. The Commission hopes that taxing the CO2 content of fuels will provide an appropriate CO2 price signal in the transport field. 

Carbon prices would be further strengthened under the directive as small installations excluded from emissions trading would have to pay for CO2 as part of their energy consumption.

Promoting biofuels

Biomass would be exempt from CO2 taxation under the directive because it is carbon neutral at end use, the Commission says. Moreover, businesses that make early investments in low-carbon technologies would get transitional exemptions, it added.

However, the industry is worried that a policy of promoting biofuels over all other fuels would disrupt the process of technological development and efficiency gains made in terms of fossil fuel use. Moreover, the simple assumption that biofuels do not produce CO2 is questioned by experts, who point to deforestation as a result of land use changes.

"We have to take care not to block the progress of existing alternative fuels," said Paul Voss, European policy advisor at the European LPG Association (AEGPL). He stressed the need to foster growth of immediately-available alternatives in parallel with a long-term ambition of developing new transport technologies.

"It's exciting to see the emergence of new transport solutions, but for passenger cars over the next decade, LPG likely constitutes our best hope for cutting emissions in transport," Voss argued.

Growing support

Many EU member states have woken up to the benefits carbon taxation could have in terms of raising revenue and helping them to meet their emissions targets. Finland and Sweden were the first to levy such a tax on fuels back in early 1990s, with encouraging results in slashing emissions (EurActiv 12/05/09).

Most recently, France outlined plans to set up a national carbon tax, starting at €17 per tonne of carbon (EurActiv 14/09/09).

But the Commission says that while national CO2 taxes can fill in gaps or avoid overlap between the ETS and the current Energy Taxation Directive, they would not address distortions within the internal market. It therefore takes the view that a harmonised carbon tax is necessary.

Current rotating EU presidency holder Sweden has been pushing the issue, but some member states fear that such a tax would interfere with their budgetary discretion. Others are apprehensive of the impact of rising energy prices on their citizens and industries.

UK Minister of State for Energy and Climate Change Joan Ruddock last week told French newspaper Les Echos that her country would not support a harmonised EU-level carbon tax, arguing that this would not suit Britain, where taxes are specifically targeted.

Overcoming member states' fears

The Commission's draft seeks to address member states' fears by allowing certain exemptions. National capitals could continue to exempt households from taxation as distributional impacts differ from one member state to another.

Furthermore, Eastern European member states would be allowed to introduce carbon taxes at a slower pace, with a transitional period stretching until 2021.

Despite the odds against a carbon tax proposal being passed by the 27 member states, which retain sole competency over direct taxation, the support of a growing number of capitals bodes well for some form of agreement.

"It can take a while but there's a lot of political will to do this," said Christian Egenhofer, senior research fellow at the Centre for European Policy Studies (CEPS).

Egenhofer argued that the legislation could pass if the Commission proposed it under the enhanced cooperation provision in the Nice Treaty. This would mean that a number of member states could go ahead with the tax if others were able to join them later on.

"There is interest from a number of member states," Egenhofer said. "I think in this context it might pass."

But many stakeholders are less optimistic, expecting the proposal to be buried once it becomes obvious that it will not make the cut in the Council.