Common position on taxes still a long way from being a reality

Date: 20/09/01

By Maria Kielmas

FEW issues highlight the fragmented state of the EU's energy market better than the thorny matter of energy taxes.

Harmonised energy taxes were first suggested by Mario Monti in 1993 and have been under active discussion since 1997. But the idea has frequently fallen foul of member states' internal politics.

The Belgian presidency now hopes to push forward 'enhanced cooperation', whereby 10 or 11 members can go ahead with a harmonised EU energy tax. But since this measure will require unanimous approval, it could take a long time.

The Swedish presidency's effort in June to harmonise energy taxes was brought to a halt by Spain's insistence that such taxes be linked to functioning internal electricity and gas markets. Madrid's economy minister Rodrigo Rato said such taxes should be contingent on a full opening of the French energy market. Britain supported Spain, though the British stance is probably based more on a fear of rekindling a hot political debate at home about EU tax harmonisation in general.

The idea behind taxing electricity and gas consumption for the first time is two-fold, according to the European Commission: firstly, to improve the functioning of the internal market; and secondly, to benefit the environment and help meet the EU's obligations under the Kyoto Protocols.

The theory is that taxes levied on energy consumption will work to cut demand. Most ambitiously these energy taxes are not to be viewed as fiscal instruments. The aim is to cut taxes on labour, which will boost employment, and shift this burden onto energy demand to help the environment. The size of this tax has not been specified.

Sweden is still keen on the energy tax and its industry supports it. "We are not afraid of the energy tax because taxes here are so high already," says Gunnar Rabe, spokesman on energy for the Confederation of Swedish Enterprise.

In short, Swedish industry hopes a Union-wide tax will mean lower taxes overall.

Of the member states, the Scandinavian countries, the Netherlands, UK, Germany, France and Italy have introduced carbon or climate taxes. Spain Portugal, Ireland, Greece and Belgium have not.

Industry groups in the members states do not all have as benign a view of energy taxes as the Swedes.

The United Kingdom's Engineering Employers Federation believes that the UK's climate change levy, introduced in April and payable only by commercial and industrial users, will not be as fiscally neutral as the government has claimed and will cost industry an extra €158.72 million during its first year.

The EU's proposed action plan aims at a 1% improvement in energy efficiency each year. Its implementation should lead to a potential for 20% saving on energy consumption by 2010, Belgian environment minister Olivier Deleuze told the European Parliament this week.

But Swedish industry claims that its own energy-intensive companies are already as efficient as they can be. "Energy costs are so high and such a large proportion of these costs is energy. If we get a new tax we will have to save costs elsewhere - usually labour," argues Rabe.

Many commentators also question the need for harmonised energy efficiency measures in a region as geographically and climatically diverse as Europe. "It is a weakness that the EU does tend to leap in where its jurisdiction is not self-evident. But the energy efficiency directive is not too prescriptive", notes Rob Bradley of Climate Network Europe in Brussels.

Taxes and subsidies have always been used to promote one energy sector over another. But there have always been contradictions. While the proposed taxes are supposed to promote clean technologies, subsidies on coal contradicts environmental goals, argues Bradley. Coal-fired electricity is the greatest producer of greenhouse gases.

A ruling by the European Court of Justice last March has brought into play the concept of state aid and taxation of the energy sector. Germany, for instance, forces conventional producers to purchase renewables at a minimum price. The European Commission argued that this was state aid even though the resources for it come from the private sector. The ECJ decided otherwise.

This now raises a question over how the EU will permit governments to compensate utilities for 'stranded assets', i.e. generating plant and supply contracts which have been left inoperable following the introduction of competition.

The compensation could be through public subsidy or increased tariffs. But every country's stranded asset regime is different. So far only Spain has been given the final green light.

The Spanish will receive €3 billion in compensation instead of the €11 billion originally requested.

The Netherlands was not allowed to receive costs to the electricity sector by raising tariffs. Support for co-generation and other environmentally friendly projects would have been included in these costs.

Article forms part of a special report on energy.