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EU Focus—Where do We Stand on the Reshaping of the Energy Taxation Directive?

The very substance of the ambitious is merely the shadow of a dream ~William Shakespeare
19 June 2012
Mayer Brown Article

A year has passed since the publication, in April 2011, by the European Commission (EC) of its Proposal for a Council Directive amending Directive 2003/96/EC (the Proposal), restructuring the European Community framework for the taxation of energy products and electricity (the Energy Taxation Directive). The purpose of this short contribution is to briefly discuss what the Proposal is seeking to achieve and provide some insights on where the process actually stands.

The core principle behind this reshaping is a changing paradigm that introduces an explicit distinction between two types of energy taxation that are either (i) specifically linked to CO2 emissions attributable to the consumption of products (CO2-Related Taxation) or (ii) based on the energy content of products (General Energy Consumption Taxation).

CO2-Related Taxation will not overlap with the European Trading Scheme (ETS), as the Proposal generally provides for taxation unless the ETS applies.


The Energy Taxation Directive was adopted in 2003. Since then, the underlying policy framework changed radically, as concrete and ambitious policy objectives have been defined for the period until 2020 by the EU climate and energy package. The European Council instructed the EC to bring the Energy Taxation Directive into line with the EU’s energy and climate change objectives.

According to the EC, the existing Energy Taxation Directive contained four major drawbacks:

  • The level of taxation is inconsistent between the various energy sources.
  • The minimum levels of taxation are not properly related to the need to combat climate change. 

  • The development of renewable fuels requires specific measures to take into account the lower energy content of such products.

  • The Energy Taxation Directive is not correlated to the ETS, thus leading to overlaps or loopholes.

The Basics of the New Paradigm

The Proposal reflects the policy of
the EC to revise the structure of the Energy Taxation Directive to take into account different objectives behind energy taxation, i.e., revenue generation and energy savings on the one hand, and environmental considerations on the other.

Under the Proposal, taxes on energy would be split into two components: CO2-Related Taxation and General Energy Consumption Taxation.

  • CO2-Related Taxation: A single minimum rate for CO2 emissions (EUR 20/t CO2) would be introduced for all sectors not covered by the ETS. This would provide a carbon price for those sectors of the economy (households, transport, smaller businesses and agriculture) that are outside the ETS.

    The CO2-related part of taxation would be zero for all biofuels that comply with sustainability criteria. Such taxation will provide for a technology-neutral advantage for all low-carbon energy sources. Introducing CO2-Related Taxation will also better align the Energy Taxation Directive to the ETS.
    Taxation will apply to all emitters not included in the ETS—those that are taxable now as well as all small installations excluded from the ETS, even if they use energy for purposes other than heating. At the same time, emitters included in the ETS will be exempt from the CO2-Related Taxation, whatever the actual scope of the ETS might be.
  • General Energy Consumption Taxation: Minimum tax rates for energy would be based on the energy content (EUR per Gigajoule, or “GJ,” which is a metric measure of energy use that applies to all energy sources) rather than volume. This means that energy sources will be taxed on the basis of the amount of energy that they generate, and greater energy efficiency will automatically be rewarded. The energy component of the tax will help to remove current distortions for competing energy sources. One GJ would be taxed in the same way, regardless of the product producing it.

    For motor fuels, the minimum level of taxation is fixed at EUR 9.6 per GJ, which corresponds to the minimum rate applicable at the time for petrol minus the corresponding CO2 component.

    For heating fuels, the current minimum level for electricity of EUR 0.15 per GJ (corresponding to approximately EUR 0.5 per MWh) will be applied to all the energy products used for heating, taking into account the energy content of the respective product.

The scope of energy taxation remains unchanged and comprises heating use and motor fuel use as well as consumption of electricity in similar situations.

Both CO2-Related Taxation and General Energy Consumption Taxation would be combined to determine the overall taxation level of a product. Member States have the flexibility to set their own rates above the EU minimum, and design their own structure for these taxes.

This new paradigm will lead to an extensive reshaping of the text of the Energy Taxation Directive. Many of the current exemptions and derogations will either be repealed or modified.

Impact on Selected Sectors

The impact that the Proposal will have on the European automotive industry, which has invested massively in promoting diesel technologies, is discussed in the following section. This section focuses on the consequences the Proposal is likely to have on three selected sectors: biofuels, electricity and nuclear energy.


Currently, biofuels are taxed on the basis of volume, at the same rate as the fuel they are intended to replace, which often may bring a competitive disadvantage to them. Under the Proposal, biofuels would be taxed on the basis of their own energy content, which is anticipated to be lower than that of competing fuels. They would also be exempt from the CO2-Related Taxation to better reflect their performance in reducing CO2 emissions. However, this positive treatment is reserved to biofuels complying with relevant sustainability criteria as defined in the Renewable Energy Directive (2009/28/EC) and in the Fuel Quality Directive (2009/30/EC).


Energy content-related tax will be levied at the point of consumption and the minimum rate will not be modified. The CO2-Related Taxation could only be levied on the input fuels used to generate electricity, as electricity does not lead to emissions at the point of consumption. However, electricity generation is, except for small electricity generation installations, subject to the ETS and will therefore be exempt from the CO2-Related Taxation.

Nuclear energy

The Proposal will not affect the treatment of nuclear energy. Electricity from nuclear sources is taxed at the point of consumption, like electricity coming from all other sources. Taxes on nuclear fuel, such as the one recently introduced in Germany or targeted for implementation in Belgium, fall outside the scope of the Energy Taxation Directive and are therefore not affected by the present revisions.

One Year After the Proposal: Is the Dream Coming True?

The Proposal faced difficulties throughout the year due to lack of consensus among the Member States and strong lobbying by related industries. Some of the EU Member States have strongly advocated against the Proposal, using procedural arguments such as a lack of legal basis or the possible lack of compliance with the subsidiarity principle (defined by Article 5 of the Treaty on European Union to mean that, other than in matters exclusive to it, the EU does not take action unless it is more effective than action taken at a national, regional or local level).

Member States’ and industries’ concerns were echoed by the European Parliament (EP), which the EC is required to consult in taxation matters. The EP follows a different path, tackling the absence of proportionality in the changes contemplated by the Proposal for motor fuel (and, in particular, diesel) taxation.

The matter was first discussed by the Parliament’s economic and monetary affairs committee in November 2011. A resolution of the EP was adopted in first reading in April 2012. Although supportive of the Proposal in principle, the EP critics concentrated mainly on the following aspects:

  • Increasing the level of taxation of diesel fuel may cause a major destabilising blow to the European automotive sector, which enjoys a competitive advantage with regard to diesel technologies. According to the EP’s rapporteur, consideration of climate and environmental policy imperatives, however necessary, is not sufficient. Energy policy and industrial policy aims constitute equally critical challenges for the EU. Further, the EP pointed out that, according to recent experience, achieving the EU target for a reduction in CO2 emissions will depend in part on increased use of vehicles with diesel engines, something the Proposal is likely to discourage.
  • The Proposal represents a significant intervention by the EU in national fiscal policies with the determination of applicable tax rates (compared to threshold levels in the current directive). The EP proposes to curb the tax increase for LPG and other alternative fuels to create a comparative advantage necessary for the development of fuel-efficient technology.

  • Any significant increase in energy prices might lead to inflation and, given the current shape of public finance in many Member States, it will be difficult for Member States to balance the effect with measures such as cuts of other tax rates. The EP, through its rapporteur, opposed the Proposal system for automatic increases in the minimum rates of taxation to follow price indexes or CO2 price movements.

Next Steps and Actions

The EP’s views are only further evidence of the absence of consensus in the matter. After the EP vote, the EC reiterated that its Proposal, as it is, is the best way forward. This disagreement is a concern given that the Proposal requires unanimity at the Council level for its approval.

The Proposal targeted 2013 as the implementation date for Member States to match the third phase of the ETS. A phase-in period for Member States to restructure their taxes and to allow national administrations, businesses and the energy sector the necessary time to adjust is foreseen. Long transitional periods for the full alignment of taxation of the energy content, until 2023, aim to leave time for the industry to adapt to the new taxation structure. However, this should not keep companies from assessing the impact of the Proposal and developing possible actions to comply with it.


  • Astrid Pieron
    T +32 2 551 5968
  • Charles-Albert Helleputte
    T +32 2 551 5982

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