EU Energy Tax Directive failing on climate change

European finance minister agreed this weekend to review the Energy Tax Directive, which sets the minimum taxes of member states on energy products and electricity. In particular, how tax on energy could better reflect climate change objectives promoting bio over fossil fuels.

However, devision exists on the extent of the update and whether international flights should continue to enjoy an exemption from VAT. Central European states, which are reliant on coal, voiced oppoistion to have any major rate increases.

The Directive was created in 2003, and lists minimum levels of taxation on: motor fuels;  gas oil; kerosene; heavy fuel oil; LPG; and natural gas. It includes an exemption from tax on fuel used for international flight. 

Finland, which holds the current presidency of the Council of the EU, has characterised the Directive as being outdated and poorly adapted to climate change challenges. Criticisms include:

• No proper indexation for inflation of the minimum rates
• Does not reflect EU objectives on biodiversity and global warming fears
• Fails to consider the environmental impact of different energy products, including their polluting capacity
• Gives too much freedom to states to set low taxes and therefore distort the workings of the internal market
• Provides a mandatory exemption for international flights and maritime transport

Whilst member states will be broadly supportive of updating the minimum tax rates, there will be opposition from many to VAT on international flights. Since the VAT Directive blocks member states charging VAT on international flights, many countries have introduced passenger duties. The Netherlands has recently championed extending this to all member states.