sou · GRB338d1 · 2004-01-01 00:00:00 — Finally, the other sectors are burdened, like the household sector, with the full level of energy tax, as well as CO2 tax. Problems of present energy-tax structure The biggest problem with the current model of energy taxation in the business sector is the sectorial classification. EU membership means that Community regulations concerning state aid apply, one key rule being that a may not apply differentiated tax levels within the business sector. These state-aid regulations have recently, and since this Committees directives were adopted, increasingly come into focus and must be taken into account in the design of a new energy-tax system. One considera- tion governing this focus has been Court of judgment in the Pipeline case. In brief, this judgment – – which was issued on and related to the appli- cation of Community state-aid regulations –– laid down that selecting certain segments of the business sector and giving them fiscal advantages over others amounts to state aid. The judgment has enhanced awareness of the rules in the and the problems undoubtedly associated with drafting special regulations of the type this Committee has been assigned to investigate. Among the various unclear implications of the Pipeline judgment is the question of whether the energy-conver- sion sector must be subject to the same regulations as the rest of the business sector. In a preliminary ruling regarding a German power company, the Court of referred to the fact that the electricity market was not yet, in the case concerned, fully deregu- lated and that some barriers to trade between the Member States were, accordingly, still acceptable. On the other hand, the energy- conversion sector is undergoing radical transformation, with exten- sive liberalisation of the electricity and gas markets. Since deregu- lation of the Swedish electricity market, electricity production has been just as subject to competition, and exposed to the same risks, as other industrial sectors. In an electricity market subject to competition, electricity production is in the nature of a capital- intensive process industry, with no special technological or market features that could justify special treatment. The outcome of a Court of review of special treatment of the energy-conver- sion sector in a Europe of deregulated electricity markets therefore appears highly uncertain. In the Committees view, it is, for that reason, highly desirable for a long-term system of energy taxation also to include the energy-conversion sector. The Swedish sectorial classification of the business sector in terms of its energy taxation thus constitutes state aid. In a deci- sion of , Commission granted a time-limited approval for the Swedish model. However, at present there is no approval for the whole model, but only for the part relating to CO2 tax. There are no guarantees whatever that the energy-tax part will also be approved. Besides the problems vis-à-vis Community to which the sectorial classification gives rise, it also means that businesses not defined as industrial are excluded from the application area for tax reduction, even if they in fact engage in energy-intensive activities. One illustrative example is the laundry trade, which is part of the service sector. On the other hand, all companies defined as conducting industrial activities benefit from the low industrial tax rate, regardless of how energy-intensive these activities actually are. These implications mean that the present Swedish energy-tax model for the business sector cannot be deemed to fulfil the requirements that the Committee considers should be imposed on such a model. Because the design of the present Swedish model means that it constitutes state aid, every significant change in the model is subject to assessment by Commission. Although such changes may be approved under certain specified conditions, approvals of this kind are, first, time-limited and, associated with extremely demanding work inputs to meet the Commissions information requirements before every new assessment. These recurrent assessments entail an uncertainty that may have an inhibiting effect on the energy-intensive part of the business sector, regarding long-term investments and other matters. This uncertainty contributes to the characteristic stop-go nature of the Swedish energy-tax system, which predated EU entry. Finally, there is reason to question the current selection criteria for sectors entitled to tax reductions. Besides the application problems and other sources of bias stemming from these criteria, they are not in line with the directive relating to energy taxation on which the EU finance ministers reached a political agreement in 2003. In this directive the approach chosen has been, instead, to use objective criteria to decide which companies are energy-intensive and may thus be eligible for tax reduction. Continuing to apply the present sectorial classification once the directive relating to energy taxation has entered into force would appear even more untenable. Summing up, , based on the above considerations, considers that the present Swedish model of energy taxation of the business sector is inadvisable as a conceivable option for the future. Accordingly, a new model must be devised. Grounds for energy-tax reliefs As mentioned above it is incumbent on the Committee, under its directives, to analyse and propose suitable criteria for distinguish- ing what should be regarded as activities subject to competition and how far this competition should warrant energy-tax reliefs. Analysis of the effects of energy taxation on the business sector show that there are grounds, in terms of both regional policy and long-term environmental policy, for certain companies to be granted energy-tax reliefs. Regional variations in the structure of energy and labour costs in the industrial sector reflect the structure of Swedish industry, with a great deal of light in and a substantial portion of basic industry, especially the industry, in the north of . Owing to the current reduced-rate regulations, the employment impact of current energy taxation in the industrial sector is small but, without reduced-rate regulations of this kind, major regional employment effects may be expected. The Committees analyses also illustrate the major bearing of electricity prices on Swedish companies choice between locating their operations in and moving them abroad. From a macroeconomic point of view, there are therefore very sound reasons for not exceeding the Communitys minimum tax rate on electricity for the business sector. Introducing green electricity certificates with a quota obligation for the greater part of the busi- ness sector would also, de facto, entail an electricity tax on busi- nesses that would probably exceed per MWh ( 1.10) even in the first few years. In environmental terms, a tax on electricity entails a (relative) reduction in CO2 tax. This would make it more profitable for companies to increase their fuel consumption in the short term and, for new investments in the long term, choose more electricity-saving but simultaneously more CO2-intensive technology. In both cases, this would result in a global increase in emissions of CO2. In terms of long-term environmental impact, there is also a cogent case for reliefs in CO2 tax for the most energy-intensive enterprises, since a high CO2 tax can be directly counterproductive. This counterproductive effect would arise because it would contribute to an inefficient elimination of energy-intensive industry and its relocation outside , to countries with lower environmental taxes and higher environment-degrading emissions. The elimination would be inefficient in the sense that Swedish heavy industry may be expected to increase its market shares in the event of a joint Community climate policy. Only on the assump- tion that the rest of Western Europe cannot be expected to follow a groundbreaking Swedish policy is it rational, in long-term macro- economic terms, to let domestic climate policy eliminate CO2- intensive Swedish industry. This should not, however, be taken as grounds for asserting that should not lead the way in climate work. On the other hand, the way in which opts to lead the way is highly significant. It is not through costly but globally inefficient meas- ures that can make the best contribution. It is by being a driving force in international discussions, since the Swedish econ- omy stands to make massive gains from an internationally co-ordi- nated climate policy, while the comparative expense of an isolated Swedish climate policy is very high. The Committees proposal: a new energy-taxation model The model proposed by the Committee covers all business activity. The Committees starting point is thus that all business activity, legally speaking, is exposed to competition, and energy taxation should there- fore treat all business activity equally. In drafting its proposal, the Committee has striven to shape the new energy-taxation system in such a way that it would be sustain- able in the long term and, owing to its general nature, not classifi- able as state aid under Community law, while functioning in such a way as to preserve the competitiveness of the business sector. Another point of departure has been the aim of shaping the proposal, as far as possible, to conform with the provisions of the forthcoming directive relating to energy taxation. Moreover, the new energy-taxation system should afford a good balance between various objectives: macroeconomic efficiency, long-term efficiency in environmental policy and regional-policy aims. The model that, in the Committees view, fulfils these requirements is described in the report as the business-sector model. Other models analysed show, according to the Committee, such severe short- comings and weaknesses as to rule them out as the basis for a reformed energy-tax system. The implications of the business- sector model are that: Energy taxation in the business sector will be kept separate from household energy taxation. The business sector (commercial activities) will be burdened only with environmental (green) taxes (on CO2 and sulphur), unlike non-commercial activities (households and public administration), which will also be subject to fiscal taxes (energy tax). Pursuant to the new directive relating to energy taxation, however, an energy tax corresponding to the mini- mum tax rate will apply to the business sectors electricity consumption. The business sectors rate of CO2 tax will be set initially at ( 0.0209) per kg of CO2 (25 per cent of the rate for households and public administration). A general limitation rule will apply to energy-intensive enter- This rule limits the CO2 tax levy on these companies fuel consumption or the energy-tax levy on their electricity consumption, as the case may be, to 0.7 per cent of the companys sales value. One requirement, however, is that the Communitys minimum tax rates must be observed, even after the limitation rule has been introduced. For the rule to be applied, companies must fulfil the definition of energy-inten- sive activity in the directive relating to energy taxation. The previous definition of the sectors entitled to tax reductions will be abolished, making the whole business sector subject to the same energy-taxation model. One implication of this is that the notion of the manufacturing process in industrial activity is to be removed from the legislation. The energy-conversion sector will be taxed in accordance with the rest of the business sector. The energy tax currently levied in the energy-conversion sector will be abolished. Instead, the Committee proposes that an energy tax be introduced on consumption of district heating outside the business sector. The new model of energy taxation in the business sector is general in the sense that it includes the entire sector. It covers all legal entities and physical persons engaged in commercial activities. Just as under current regulations, taxation is assumed to relate solely to energy used as motor fuels and for heating, but not other purposes (raw materials, process energy). The precise definition of the business sector will be extremely important in the new tax system. The previous tax-reduction limit for the manufacturing process is now to be superseded by the dividing-line between the business sector (commercial activities), on the one hand, and households and public authorities on the other. One issue thereby brought to the fore is whether the word- ing of the definition of commercial activities should, for competi- tion reasons, refer specially to certain activities in the public sector. These could, for example, be those conducted by independent schools and private hospitals that are run in competition with those under public management. Since energy costs are of limited rele- vance to this type of activity, and since in competing private-sector activities are also largely funded by the public sector, it appears simpler to adjust any distortions via the funding system than via the tax system. On the other hand, the Committee consid- ers that the energy-conversion sector should operate under the same conditions, and that the kind of activities that are conducted in the form of municipal administrations should be placed on a par with commercial activities with respect to energy taxation. The previous dividing line in the property stock between the manufacturing process and other activities, and between agricul- tural operation and private homes, is now to be replaced by a general distinction in the property stock between the business sector, on the one hand, and households and public administration on the other. The size of the public sector is not affected by the choice of model. This means that although the proposals involve changes in the tax levy from public authorities, municipalities and county councils owing to changes in payroll tax and energy taxes, this is to be compensated for by means of changes in the award of appro- priations and government grants for municipalities and county councils. The Committees proposal: a new general limitation rule (the 0.7 per cent rule) Function of the limitation rule Although the Committee recommends a generally lower level of energy taxation in the business sector than for households and public authorities, a need for further tax reduction nonetheless persists for a finite group of companies. These are, above all, those in energy-intensive industry, but certain other energy-intensive companies will also be able to apply the limitation rule. The purpose of the limitation rule is, as the name implies, to restrict the tax levy to a certain defined proportion of companies sales value. In estimating the size of their tax reduction, companies can be credited both with the CO2 tax on fuels and the energy tax on electricity. The rule is not, however, a pure ceiling, since the Communitys minimum tax rates must be complied with. These minimum tax rates will, with the new directive relating to energy taxation, apply not only to oils but also to coal, natural gas and electricity. Nature and level of the limitation rule One initial question is whether the limitation rule, as such, should be based on sales value or value added. The choice is not self- evident and the implications for companies vary, of course, depending on what is chosen. Although value added, broadly speaking, makes up roughly half of production value in the busi- ness sector, the spread between different sectors and at company level is very large. If the purpose of a limitation rule is to protect technologically energy-intensive enterprises, a rule based on sales value appears most suitable. If, on the other hand, the purpose is to protect companies with low profitability from going out of business because of higher energy taxes, a rule based on value added seems most appropriate. In the latter case, it is a combination of energy intensity and profitability that determines which companies qualify for tax reduction. Since profitability varies considerably more than sales value from year to year, the number of companies qualifying under the limitation rule will vary greatly in the course of one business cycle. It is quite conceivable that some companies protected by the limitation rule would not, in normal parlance, be termed energy-intensive at all but, rather, characterised as profitable service enterprises. In the Committees view, a limitation rule based on sales value best reflects the fundamental purpose of energy-tax reduction. therefore proposes that the limitation rule be based on sales value. As for the choice of level at which the limitation rule should apply, this is determined mainly by the need to avoid excessive tax levels for the energy-intensive enterprises. has, in particular, considered levels of between 1.0 and 0.5 per cent, and after careful consideration proposes a limitation rule at the level of 0.7 per cent. Definition of energy-intensive enterprises The forthcoming directive relating to energy taxation will clarify the forms under which reduction of energy tax and, accordingly, differentiated tax levels may be applied by Member States. One requirement of this reduction (and thus application of the limitation rule) is that it is applicable only to companies conform- ing to one of the definitions of energy-intensive enterprises in the directive. A company must have either a total energy cost, includ- ing tax, of at least 3 per cent of its production costs (sales value) or a 0.5 per cent minimum ratio of energy tax to value added. However, on average, the Communitys minimum taxes must always be paid. Thus, when the directive relating to energy taxation comes into force, only companies complying with one of the two definitions of energy-intensive enterprises will be eligible for limitation of the energy-tax levy. The Committees analysis shows that if only one of the criteria of energy intensity is used, the probability is very high that certain companies will not qualify to benefit from the limitation rule. therefore proposes that the criterion for classification as an energy-intensive enterprise, which must be fulfilled in order for the limitation rule to be applied, should be optionally based on either value added or sales value. The Committees review of regulations concerning collection of electricity taxes Deregulation of the electricity market has changed both the condi- tions and the terms of the market. have, for example, greater scope for choosing their electricity supplier. The regula- tions and system for levy of energy tax on electricity, on the other hand, have not been changed. now proposes that the role of electricity suppliers as liable to tax on their deliveries to consumers be assumed by the network owners. The main reason for this proposal is that, owing to the deregulated market, electricity suppliers local knowledge of business activities and previous consumption is steadily decreasing. The electricity suppliers scope for checking and monitoring their has therefore radically deteriorated, and they are now basically reduced to the particulars they can obtain from the network owners. Since the network companies possess knowledge of the circumstances and, in particular, their consumption, it is also natural for these companies to assume responsibility for the tax collection. Implications for public finances Changes in energy taxation in the business sector have, of course, implications for public finances. Broadly speaking, extending the energy-tax structure of manufacturing industry to the whole of the business sector would entail a loss of some billion ( 550m) net in tax revenue, i.e. when various indirect effects are taken into account. One central issue is therefore how a model that yields a substan- tial loss of tax revenue is to be financed. The Committee considers, in view of its directives, that its remit does not include proposing a further green tax shift. Instead, in its view, it should only propose financing of the tax shortfall that arises from the business-sector model, with various aspects, especially those relating to equity and income distribution, taken into account. thus refrains from having opinions on the form of the further tax shift within the framework of the ten-year programme. This programme, for a total of billion ( 3.3bn), was presented by the Government in the Spring Fiscal Policy in 2000. However, it is in the nature of things that, in large measure, finan- cing of the tax reform must take place within the energy sector. In the Committees view, it is reasonable for the business sector to join in financing a reorganisation of energy taxation to a large extent, since this would result in substantial tax reliefs for the busi- ness sector as a whole, even if the reliefs arise only for the service sector. Since the service sector is the big winner from the tax reform, a marginal rise in taxes on wages and salaries through a rise in payroll tax appears to be an attractive option in terms of both equity and financing. Moreover, a reversal of the latest increase in tax-allocation reserves appears to be favourable. The energy tax on electricity that, due to the directive relating to energy taxation, is to be introduced for the whole business sector will contribute to this financing to some extent. The tax shortfall from the energy-conversion sector is relative high: it is estimated (with some uncertainty) at roughly million ( 165m) gross. A consumption tax on heating may therefore also seem reasonable from the equity point of view, i.e. it appears unreasonable for the entire tax shortfall from the energy-conversion sector to be offloaded on the other sectors. In addition, since some 70 per cent of district heating is owned by municipalities, a substantial share of the tax reliefs for the energy- conversion sector will benefit municipal residents either directly, through lower heating prices, or indirectly through lower local tax. When it comes to the distribution of the tax burden on house- holds, it is imperative for the terms of competition between district heating, electricity and various heating fuels not to be affected. Committee therefore proposes small but uniform rises in house- hold tax rates on electricity, oil and natural gas, and also –– as mentioned above –– the introduction of an energy tax on district heating. Since electricity and fuel taxes are regressive in nature, introducing an energy tax on heating represents a burden on households that is slightly more neutral in terms of income distri- bution and regional impact. From an environmental point of view, raised taxes on petrol and diesel are attractive. Unless heavy industry, through large-scale elimination of plants, is going to be obliged to bear much of the burden of the climate policy, emissions from the transport sector will also have to be reduced. This will take place without substantial tax increases on vehicle fuels. It may be noted here that the business sector accounts for some 25 per cent of revenue from a rise in petrol tax and roughly 90 per cent of the revenue from raising tax on diesel. Given the above considerations, the Committee proposes financing of the business-sector model according to Table 1. Proposed financing of the Committees draft model of energy taxation SEK m, net Euro1 m, net Payroll tax, 0.3 per cent Reversal of tax-allocation reserves Energy tax on electricity: per kWh ( 0.0055) at 60 TWh, business sector Energy tax on heating, ( 0,0033) at , Energy tax on electricity: ( 0.0011) at , Oil: ( 0.0011) per kWh = ( 10.98) per m3, Natural gas: ( 0.0011) per kWh = ( 0.011) per m3, households Petrol: ( 0.0132) per litre Diesel: ( 0.0132) per litre /krona exchange rate on 1 October 2002: = (OJ C 237, 2.10.2002 p.1).