The Green Paper was launched jointly by Environment and Tax Commissioners Stavros Dimas and László Kovács. Mr Kovács plans to focus on revising the Directive during the second half of his term in office. Speaking at the first Brussels Tax Forum on 19 March, less than two weeks after EU heads of state agreed to cut greenhouse gas emissions by 20% by 2020, he said taxation was one of the instruments that "come into play in this context".
The paper sets out the case for greater use of market-based instruments such as taxes, tradable permits and subsidies to achieve a range of environmental objectives - but its proposals for revising energy taxation grab the most attention.
Efforts to introduce a tax on energy’s greenhouse gas emissions date back to 1992 when opposition from industry made the proposed carbon tax’s introduction conditional on similar action by the US (ENDS Report 208, pp 33-35 ).
The Commission tried again in 1997 with less ambitious proposals to harmonise and gradually increase the taxation of energy products. After six years, during which various member states, including the UK, blocked the proposals, the energy taxation Directive was adopted (ENDS Report 339, p 50 ).
But the Green Paper disappointed the European Environmental Bureau, which had hoped it would announce "solid environmental tax reform proposals". Instead, it said it "failed to announce the big political initiatives we need to make this work".
To get round the need for unanimity on legally binding EU tax decisions and the willingness of some member states, particularly the UK, to consistently block such decisions, the EEB suggested the European Council agree on a 10% shift in tax income in ten years, from labour to energy and environment, and agree on a minimum level of coordination on how to achieve it.
When it was adopted in 2003, the Directive updated the minimum tax rates for mineral oils to allow for inflation and extended the framework to include coal, natural gas and electricity for use as motor or heating fuel. However, the rates are hedged about with numerous options for rebates and exemptions.
Importantly, the Directive also paves the way for taxation of fuel used in domestic and intra-EU flights, subject to bilateral agreement. But fuel used in international flights, and in maritime transport within EU waters, remains exempt.
The Green Paper proposes dividing these minimum levels into energy and environmental elements. To encourage energy efficiency, all fuels would be taxed according to their energy context. This is neutral because the higher the energy content, the lower the consumption necessary to generate the same amount of energy.
In addition, fuels could be taxed according to their environmental impact, in particular their greenhouse gas emissions. A working document2 accompanying the Green Paper says that this would require "clear guidelines on the environmental aspects of different fuels" and that "potentially, taxation could as well specifically address the non-greenhouse gas emissions".
The paper says that 1 gigajoule of energy corresponds on average to 0.09 tonnes of CO2 generated in the case of coal, 0.07 tonnes for heating gas oil and heavy fuel oil, and 0.06 tonnes for liquid petroleum gas, kerosene and natural gas. Fuels "with proven environmental benefit" would not carry the environmental segment of the tax.
There "may be justification", it says, for applying lower taxation rates to heating fuels than to transport fuels because of the indispensable nature of heating fuels.
Taxing electricity might not be appropriate because "the CO2 emissions derived from most electricity production are currently addressed by the EU emissions trading scheme". But the paper makes no mention of power generators having made huge windfall profits by passing on a charge to their customers for their allowances, even though they received them free of charge from governments.
Excluding the environmental impacts addressed by the EUETS from the scope of the Directive could also avoid difficulties stemming from the differing features of the trading scheme - which sets a uniform price across the EU that varies over time - and energy taxation - which allows member states to set tax rates above the minima as they see fit, and which tend to be stable over time. But, says the paper, "any move towards such a solution merits further in-depth analysis, especially if the EUETS is significantly broadened in scope".
The documents say there "might be a need" to "tackle the remaining environmental impacts" of electricity production, in particular from small installations generating electricity that fall outside the scope of the EUETS, and from aviation. This would be done by "taxing the inputs", but it is not clear whether this refers solely to greenhouse gas emissions or to wider environmental impacts.
The document is open-minded on whether energy taxation should favour renewables above nuclear, merely noting that the Directive’s provisions allowing electricity produced from certain renewables to be partially or totally exempt does not extend to nuclear power.