Energy Taxation Directive: No time to waste

The Energy Taxation Directive is an opportunity to put Europe on a path to climate neutrality that can also lead us to a fairer society, explains Henrike Hahn.
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By Henrike Hahn

Henrike Hahn (DE, Greens/EFA) is deputy spokesperson of the delegation of Alliance 90/The Greens in the European Parliament.

05 Mar 2021

The revision of the Energy Taxation Directive (ETD), scheduled by the European Commission for June 2021, strikes directly at the heart of the European Green Deal’s implementation. The Directive can provide fiscal incentives for transitioning from the most polluting sources of energy to the widespread use of renewable energies.

We, the Greens, are calling for an urgent update and reform of the current fiscal system. The existing labour, capital and environmental taxation schemes have not kept up with recent political, economic, and societal developments and they are simply unfit to deliver on the promises of the European Green Deal. We therefore need to better align the Energy Taxation Directive with the energy market and current climate challenges in order to contribute to the EU 2030 energy targets and achieve climate neutrality by 2050 at the latest.

“Taxes on ecologically damaging activities, that also focus on resource consumption, can actively support the ecologic transformation”

There is no time to waste. We need to transition to a green economy and benefit from the innovation, sustainable investment and jobs that it will bring. Putting a focus on the prioritisation of renewable energy and resource efficiency is key. At the core of the ETD reform is the taxation of energy resources according to their potential climate and environmental damage, not according to the views of lobbyists. Interestingly, the last attempt to reform the ETD met resistance from the German government, in particular the issue of Diesel fuels. However, we need to take rational political decisions and action against climate change now as we are running out of time.

An ecological financial reform can ensure that prices take greater account of the consumption of natural resources and follow-up costs. Smart, well-designed taxes can play a direct role by providing the right incentives for sustainable practices as well as for the balanced and fair distribution of the costs and benefits of the green transition across regions, businesses, and citizens. What we need first, is effective carbon pricing and the removal of fossil fuel subsidies crystallised in the wide range of exemptions and reductions. A carbon price sets positive incentives for the development of climate friendly technologies and has the potential to reward those businesses that lower their emissions and produce in a resource effcient way, promoting recycling and the circular economy.

Interestingly, revenues from taxes on pollution and resources will stay remarkably low, yet they could potentially become a source of increasing revenue through the application of the so-called ‘polluter pays’ principle - as well as being difficult to evade due to the characteristics of the tax base. Energy tax revenues are the main component of environmental tax receipts for almost all countries - accounting for almost 78 percent of EU-27 environmental tax revenues - followed by non-fuel transport taxes at 19 percent and pollution/resource taxes at three percent.

To sum up, taxes on ecologically damaging activities, that also focus on resource consumption, can actively support the ecologic transformation. Additionally, environmental taxes should always be accompanied by compensatory measures, such as lower labour income taxes or social security contributions, targeted at lower income households. All this should go alongside additional public investments aimed at meeting the Sustainable Development Goals, while not increasing the cost of living for low- and middle-income households.

“Unfortunately, at European level, tax matters still fall under the unanimity rule; unanimity is impeding important tax reforms”

However, the COVID-19 pandemic will have severe repercussions on EU Member State economies, their public finances, and businesses. In this regard, taxes will play a key role, both in terms of revenue levels and the tax structure that needs to be adapted to both a post-COVID era and our climate challenges. Therefore, it makes sense to encourage EU Member States to find smart ways for better and more environmentally friendly taxation. It also has to be stressed that an efficiency-orientated tax design is at least as important as the tax type.

Member States should consider environmental taxes, taking into account the fact that prices should reflect supply and environmental costs as well the consequences of climate change and local air pollution. I believe that harmonisation and minimum rates would lead to more effective, simpler, and fairer tax systems, that strengthen national sovereignties. There is certainly room for significant revenue and effciency gains at tax administration level too. Unfortunately, at European level, tax matters still fall under the unanimity rule; unanimity is impeding important tax reforms.

We call on the European Commission to ensure that the European Parliament is fully included in the decision-making process in the Energy Taxation Directive and thereby can help to set up a more balanced and fairer tax system that will support the immense challenges posed by climate change and the Coronavirus crisis.