Proposal for a COUNCIL DIRECTIVE amending Directive 92/81/EEC with regard to the possibility of applying a reduced rate of excise duty on certain mineral oils containing biofuels and on biofuels

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Introduction

In this explanatory memorandum, a 'biofuel' is a product obtained from certain renewable resources which is subject to excise duty under Directive 92/81/EEC [1]. A biofuel can therefore be used, in its pure or blended form, as a motor or heating fuel.

[1] OJ L 316, 31.10.1922, p. 12, as last amended by Directive 94/74/EC (OJ L 365, 31.12.1994, p. 46).

The Commission communication on alternative fuels for transportation and on a set of measures to promote the use of biofuels [2] identifies two possible courses of action for the latter purpose [3]:

[2] OJ C

[3] Having rejected the possibility of subsidising raw material production under the common agricultural policy.

- applying different rate of excise duty in favour of biofuels to make them competitive in the market;

- specifying a minimum percentage of biofuel in motor fuels sold.

The attached proposal for a Council Directive therefore sets out a new framework of taxation for biofuels. A second proposal for a Directive of the European Parliament and of the Council will set a statutory minimum biofuel content for motor fuels sold after 2005 [4].

[4] OJ C

2. Background

2.1 Promoting biofuels

The Commission and the Council have been encouraging the development of renewable energies, and biofuels in particular, since 1985. The Directive relating to oil savings through the use of substitute fuel components [5] stresses the role biofuels can play in reducing Member States' dependence on oil imports and authorises the incorporation into petrol of up to 5% of ethanol by volume and up to 15% of ethyl-tertiary-butyl-ether (ETBE) by volume. The Council Decisions of 1993 and 1997 on promoting renewable energies in the Community (Altener [6] and Altener II programmes [7]) are aimed at securing a market share for biofuels of 5% of total motor vehicle fuel consumption by 2005. The 1997 White Paper on renewable sources of energy [8] further recommended setting a production target of 18 million tonnes of liquid biofuels by 2010 as part of an overall goal of doubling the share of renewables in EU energy consumption by the same year. The communication on the implementation of the Community strategy and action plan on renewable energy sources (1998-2000) [9] reinforces these guidelines. The communication entitled "A Sustainable Europe for a Better World: A European Union Strategy for Sustainable Development" [10], presented to the Gothenburg European Council of 15 and 16 June 2001, also highlights the important role of biofuels in tackling climate change and in the development of clean energies.

[5] Council Directive 85/536/EEC of 5 December 1985 on crude-oil savings through the use of substitute fuel components in petrol (OJ L 334, 12.12.1985, p. 20).

[6] Council Decision 93/500/EEC of 13 September 1993 concerning the promotion of renewable energy sources in the Community (Altener programme); (OJ L 235, 18.9.1993, p. 41).

[7] Council Decision 98/352/EC of 18 May 1998 concerning a multiannual programme for the promotion of renewable energy sources in the Community (Altener II); (OJ L 159, 3.6.1998, p. 53).

[8] COM(97) 599 final, 26.11.1997.

[9] COM(2001) 69 final, 16.2.2001.

[10] COM(2001) 264 final, 15.5.2001.

Recent work indicates that the development of biofuels would also have a positive impact in the agricultural sector and on employment.

Lastly, the Commission Green Paper "Towards a European strategy for the security of energy supply" [11] stresses the key role of tax instruments in achieving the objectives set in terms of volumes by reducing the price differential between biofuels and rival products.

[11] COM(2000) 769 final, 29.11.2000.

2.2 Taxation framework

Energy products are basically taxed in three ways: excise duties, which are specific duties (proportional to the physical quantity of the product), dedicated taxes and duties and VAT, which is an ad valorem tax (proportional to the selling price of the product). At the current moment, there is no Community framework for energy products other then mineral oils nor for taxes other than excise duty and VAT.

In the excise field, the Member States decided unanimously in 1992 to introduce a Community system for the taxation of mineral oils based on two Directives, one on the harmonisation of the structures of excise duties (92/81/EEC), the other on the approximation of the rates of excise duties (92/82/EEC) [12] on mineral oils. The two Directives set a minimum rate of tax for each mineral oil according to its use (motor fuel, industrial and commercial use, heating). In practice, excise duty is often far in excess of the minimum Community rates, which have not been adjusted since 1992, and differs enormously from one Member State to another.

[12] OJ L 316, 31.10.1992, p. 19, as last amended by Directive 94/74/EC (OJ L 365, 31.12.1994, p. 46).

The Directives provide for a number of compulsory tax exemptions [13] and also allow Member States further specific excise duty exemptions or reductions either under fiscal control or subject to an application to the Commission and the unanimous approval of the Council, acting on a proposal from the Commission.

[13] e.g. on fuels used in commercial air transport.

Such derogations are often introduced out of a fear of seeing certain sectors of the economy lose their competitiveness when ambitious fiscal reforms involving tax increases for environmental purposes are adopted at national level.

However, there are other reasons for the derogations too, in particular to facilitate the introduction of more environmentally friendly fuels. Differential excise rates, for example, help the market share of low sulphur fuels to develop more rapidly. By allowing products to be differentiated by environmental category, tax incentives are an effective method for steering economic operators (business and consumers) towards products which promote sustainable development.

Lastly, derogations are also aimed at the development of public transport, particularly in urban centres, by allowing tax exemptions or reductions on fuel used by local public passenger transport.

2.3 Tax treatment of biofuels

Pursuant to Directive 92/81/EEC, biofuels blended into motor or heating fuel are taxed according to end product and use. On being added to petrol, for example, ethanol, which is not a mineral oil within the meaning of Directive 92/81/EEC, becomes a motor fuel subject to the current rate of excise duty on petrol in the Member State concerned.

Member States are allowed two possibilities by Directive 92/81/EEC for implementing measures to reduce or exempt excise duties on biofuels.

Firstly, under Article 8(2)(d) of the Directive, "Without prejudice to other Community provisions, Member States may apply total or partial exemptions or reductions in the rate of duty to mineral oils used under fiscal control: ... in the field of pilot projects for the technological development of more environmentally-friendly products and in particular in relation to fuels from renewable resources".

Secondly, according to Article 8(4) of Directive 92/81/EEC, "the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce further exemptions or reductions for specific policy considerations".

In September 2000, the Court of First Instance [14] annulled the Commission decision of April 1997 which established the compatibility of the state aid scheme [15] in France involving the reduction of excise duty on ethyl-tertiary-butyl-ether (ETBE) on the grounds that the legal basis for the tax derogation, i.e. Article 8(2)(d) of Directive 92/81/EEC, was not relevant because the manufacture of ETBE in France had gone beyond the pilot project phase.

[14] CFI judgment of 27.9.2000, Case T-184/97, BP Chemicals v Commission.

[15] Decision of 9.4.1997, SG (97) D/3266.

Prior to the CFI judgment, Member States allowing tax reductions or exemptions for biofuels had made use only of the option offered by Article 8(2)(d) of Directive 92/81/EEC. Subsequently, in accordance with Article 8(4) of Directive 92/81/EEC, the French, Italian and UK authorities have applied to the Commission for derogations allowing them to apply excise duty reductions on biofuels.

3. Objective and scope of the proposed Directive

The development of renewable energies, in particular biofuels, is a clear political priority for the EU in the context of commitments on the reduction of greenhouse gases. Security of EU energy supply is also becoming of increasing importance.

Tax incentives are an effective tool of both environmental and energy policy. Taxes make up a significant proportion of the selling price of energy products, in particular motor and heating fuels.

Appropriate differentiation of excise rates would contribute to the development of the biofuel industry by offsetting the high cost of manufacturing biofuels compared to fossil fuels. At a crude oil price per barrel of between USD 25 and 30, the cost of producing pure biodiesel, unblended with fossil fuel, is currently EUR 0.25-0.30 more per litre than for fossil diesel oil [16].

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The effectiveness of tax instruments is often enhanced if the tax (relief) measures form part of a coherent package of technical, regulatory and economic measures. This is the case here as two proposals for directives have been drawn up in conjunction, one on the compulsory incorporation of biofuel in fuels sold, the other providing Member States with a flexible economic instrument to help implement the first proposal or even go further than its objectives.

The need to adopt a simple and transparent legal framework for the implementation of reductions in the excise duty on biofuels was already acknowledged in 1992 in the proposed Directive on excise duties on motor fuels from agricultural sources [17] and again in 1997 in the proposal for a Council Directive restructuring the Community framework for the taxation of energy products [18], Article 14(1)(b) and (c) (biomass and waste) which allows Member States to apply reductions and/or exemptions in excise duty on biofuels. Unfortunately, the 1992 proposal was not adopted by the Council [19] and the 1997 proposal is still on the Council table [20].

[17] Proposal of 19.2.1992 (COM(92) 36 final, published in OJ C 73, 24.3.1992, p. 6), as amended on 1.7.1994 (COM(94) 147 final, published in OJ C 209, 29.7.1994, p. 9). The proposal is often referred to as the "Scrivener"' proposal.

[18] COM(97) 30 final, 12.3.1997.

[19] The proposal was withdrawn by the Commission in 1999.

[20] The current proposal for a directive does not affect the 1997 proposal.

The definition of biofuels in the 1997 proposal still applies today subject to the addition of water when used, for example, with certain fuels and additives ("aquazole").

The burgeoning interest in the development of biofuel industries is clearly illustrated by the tax incentive programmes implemented by some countries to promote biofuels and a close inspection of recent Member State budgets and the ongoing debates in various national parliaments.

Despite variations in the types of product concerned, the projects generally include a tax-related component: a reduction in excise duties.

Faced with the prospect of an ever-increasing number of individual applications for excise reduction or exemption measures from Member States under Article 8(4) of Directive 92/81/EEC, the Commission considers it in the Community interest to establish a legislative framework on the basis of Article 93 of the Treaty to provide economic operators and Member States with the necessary legal certainty required to ensure the development of a genuine market in these products. A Community framework is conducive to better functioning of the internal market.

The attached proposal for a directive allows Member States to reduce excise duties, under fiscal control, in proportion to the percentage of biofuel incorporated in the fuel or end product. This proportional reduction in tax is consistent with the objective of the regulatory Directive as the higher the percentage of biofuel, the greater the value of the potential reduction in excise duty on the end product.

With a view in particular to mitigating the loss of Member State budget resources, however, the actual amount of tax on the end product may not be less than 50% of the normal rate of excise duty for the corresponding propellant. Transitory measures are foreseen in favour of products solely made up of biofuels, which have been totally exempted from excise duty on 1 January 2001. Furthermore, if required by specific circumstances at national level, additional exemptions or reductions may be authorised according to the procedure of Article 8(4) of Directive 92/81/EEC.

In order to limit distortions of competition and maintain the incentive of a reduction in costs for producers and distributors of biofuels, the proposal calls on Member States to set up excise reduction mechanisms which take account of changes in raw material prices so that in the event of a sustained rise in crude oil prices, for example, the lower tax rates do not over-compensate for the extra cost of manufacturing biofuels [21].

[21] E.g.: the price of pure biodiesel (i.e. of 100% agricultural origin) is approximately EUR 0.35 per litre higher when a barrel of crude oil is at USD 20 and EUR 0.20 when it is at USD 35.

The proposal also contains an additional optional reduction for biofuels used by local public passenger transport, including taxis, and by public authority-operated vehicles identified in the communication on alternative fuels for transportation as appropriate and setting a good example.

To take into account the principle of free movement of goods in the internal market, only some biofuels, intended for use as heating fuel or motor fuel, have to be integrated in the scope of Directive 92/12/EEC, [22] on the general arrangements for products subject to excise duty and on the holding, movement and monitoring of such products. Implementing measures are included in order to define what has to be understood by a product "intended for use as heating fuel or motor fuel". Lastly, it is important to ensure monitoring of derogations, by limiting their duration.

[22] OJ L 76, 23.3.1992, p. 1.

4. Conclusion

The proposed Directive (amending Directive 92/81/EEC) will not only meet the current need to align national biofuel taxation schemes but will help Member States establish the necessary economic and legal conditions to achieve the targets to reduce emissions of greenhouse gases and to achieve security of EU energy supply which are stated in the proposed regulatory Directive setting the minimum percentage of biofuels in motor fuels sold after 2005.

The proposed tax Directive helps to provide flexible instruments which, in line with the subsidiarity principle, can be adapted to the budgetary constraints, local conditions (e.g. for crop growing) and technological choices of each Member State.

2001/0266 (CNS)

Proposal for a COUNCIL DIRECTIVE amending Directive 92/81/EEC with regard to the possibility of applying a reduced rate of excise duty on certain mineral oils containing biofuels and on biofuels

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 93 thereof,

Having regard to the proposal of the Commission [23],

[23] OJ C

Having regard to the opinion of the European Parliament [24],

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Having regard to the opinion of the Economic and Social Committee [25],

[25] OJ C

Whereas:

(1) Article 6 of the Treaty provides that environmental protection should be integrated into Community policies with a view to promoting sustainable development.

(2) As a party to the United Nations Framework Convention on Climate Change, approved by Council Decision 94/69/EC [26], the Community has undertaken to take the necessary steps to stabilise greenhouse gas concentrations in the atmosphere at a level that would preserve the climate from any dangerous upheaval.

[26] OJ L 33, 7.2.1994, p. 11.

(3) In its resolution of 8 June 1998 [27], the Council endorsed the Community strategy and action plan on renewable energy proposed by the Commission and called for specific measures on biofuels - that is to say, fuels derived from renewable resources.

[27] OJ C 198, 24.6.1998, p. 1.

(4) The Communication of the Commission entitled "A Sustainable Europe for a Better World: A European Union Strategy for Sustainable Development" [28], highlights the important role of alternative fuels, including biofuels, in tackling climate change and in the development of clean energies.

[28] COM(2001) 264 final/2, 15.5.2001.

(5) Development of biofuels encourages diversity in the Community's energy sources and thereby contributes to the medium and long-term security of its energy supply.

(6) The relative prices of energy products are key factors in the Community's environmental protection, energy and transport policies. As biofuels are subject to taxation under Council Directive 92/81/EEC of 19 October 1992 on the harmonisation of the structures of excise duties on mineral oils [29], appropriate differentiation of excise rates would contribute to the development of the biofuel industry by lowering the high cost of producing biofuels as compared to fossil fuels.

[29] OJ L 316, 31.10.1992, p. 12; Directive as last amended by Directive 94/74/EC (OJ L 365, 31.12.1994, p. 46).

(7) It is therefore desirable to establish a Community framework for reducing excise duties so as to promote biofuels, thereby contributing to the better functioning of the internal market and affording Member States and economic operators a suficient degree of legal certainty.

(8) The tax differentiation measures should form part of a coherent package of technical, regulatory and economic measures. Directive 2001/.../EC of the European Parliament and of the Council of ... 2001 [on the promotion of the use of biofuels for transport] [30] sets a compulsory minimum percentage of biofuels in all motor fuels sold.

[30] OJ L

(9) Member States should be allowed the necessary flexibility to formulate and implement policies adapted to national circumstances.

(10) Distortions of competition should be limited and the incentive of a reduction in the basic costs for producers and distributors of biofuels should be maintained through inter alia the application by Member States of excise reduction mechanisms reflecting changes in the quoted prices for raw materials.

(11) In some cases, reduced rates of excise duty which are lower than the minimum rates laid down by Council Directive 92/82/EEC of 19 October 1992 on the approximation of the rates of excise duties on mineral oils [31] should be allowed.

[31] OJ L 316, 31.10.1982, p. 19; Directive as last amended by Directive 94/74/EC.

(12) Special measures are required for local public passenger transport, including taxis, and public authority-operated vehicles. A transitory period should be allowed in favour of unblended biofuels, which have been totally exempted from excise duty since 1 January 2001.

(13) Excise differentiation measures achieved under fiscal control may be supplemented by additional exemptions or reductions according to the procedure under Article 8(4) of Directive 92/81/EEC. No later than 31 December 2007, the Commission should report to the Council on these additional measures.

(14) The duration of reductions in excise rates should be limited so as to enable their application to be monitored.

(15) A multiannual programme of a maximum length of six years is sufficient for planning investment projects in the sectors concerned.

(16) Certain biofuels, if intended for use as motor fuel or heating fuel, should be treated as mineral oils in order to bring them within the scope of Council Directive 92/12/EEC of 25 February 1992 on the general arrangements for products subject to excise duty and on the holding, movement and monitoring of such products [32]. Implementing measures should define at Community level what is to be understood by a product intended for use as motor fuel or heating fuel.

[32] OJ L 76, 23.3.1992, p. 1; Directive as last amended by Directive 2000/47/EC (OJ L 193, 29.7.2000, p. 73.

(17) The provisions of this Directive shall be without prejudice to the application of Article 27(1)(a) and (b) of Council Directive 92/83/EEC of 19 October 1992 on the harmonisation of the structures of excise duties on alcohol and alcoholic beverages [33], as regards the compulsory exemption of denatured alcohol and the arrangements for its distribution, in view of the fact that the present tax arrangements should be applied solely to the specific case of denatured alcohol used as a fuel or fuel additive in accordance with Article 2(3) of Directive 92/81/EEC.

[33] OJ L 316, 31.10.1992, p. 21.

(18) Since the measures necessary for the implementation of this Directive are measures of general scope within the meaning of Article 2 of Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission [34], they should be adopted by use of the regulatory procedure provided for in Article 5 of that Decision.

[34] OJ L 184, 17.7.1999, p. 23.

(19) Member States should communicate to the Commission, for information purposes, the national tax measures which they adopt on biofuels. The obligation to communicate this information does not release Member States from the obligation of notification provided for in Article 88(3) of the Treaty. This Directive does not prejudice the outcome of any future State aid procedure that may be undertaken in accordance with Articles 87 and 88 of the Treaty.

(20) Directive 92/81/EEC should therefore be amended accordingly.

HAS ADOPTED THIS DIRECTIVE:

Article 1

Directive 92/81/EEC is hereby amended as follows:

(1) In Article 2(1), the following points are added:

"(m) products falling within CN codes 1507 to 1518, if they are intended for use as heating fuel or motor fuel;

(n) products falling within CN code 2905 11 00 which are not of synthetic origin, if they are intended for use as heating fuel or motor fuel."

(2) In Article 2a (1), the following points shall be added:

"(f) products falling within CN codes 1507 to 1518, if these are intended for use as heating fuel or motor fuel;

(g) products falling within CN code 2905 11 00, which are not of synthetic origin, if these are intended for use as heating fuel or motor fuel."

(3) The following Article 2b is inserted:

"Article 2b

For the purpose of Article 2(1)(m) and (n) and Article 2a(1)(f) and (g), the meaning to be assigned to products intended for use as heating fuel or motor fuel shall be defined in accordance with the procedure referred to in Article 9a (2)."

(4) The following point IIa is to be inserted:

"IIa. Reductions for biofuels

Article 8b

From 1 January 2002 to 31 December 2010, Member States may, without prejudice to Article 8f, apply a reduced rate of excise duty under fiscal control on the taxable products referred to in Article 2 where such products are made up of, or contain, one or more of the following biofuels:

(a) products falling within CN codes 1507 to 1518, 4401 and 4402;

(b) products falling within CN codes 2207 20 00 and 2905 11 00 which are not of synthetic origin;

(c) products produced from biomass;

(d) water (CN codes 2201 and 2851 00 10).

"Biomass" shall mean the biodegradable fraction of products, waste and residues from agriculture (including vegetal and animal substances), forestry and related industries, as well as the biodegradable fraction of industrial and municipal waste.

Article 8c

1. The reduction in excise duty resulting from the application of the reduced rate laid down in Article 8b may not be greater than the amount of excise duty payable on the volume of biofuels present in the products eligible for the reduction.

2. The levels of taxation applied by Member States on the products made up of or containing biofuels referred to in Article 8b may be lower than the minimum rates specified in Directive 92/82/EEC.

However, the level of taxation of these products, if intended for use, offered for sale or used as motor fuel, may not be lower than 50% of the normal rate of excise duty applied by the Member State on corresponding fuels.

"Level of taxation" shall mean the total amount of all indirect taxes charged, except value added tax, calculated directly or indirectly on the quantity of product consumed.

3. The Member States, which on 1 January 2001 totally exempted products solely made up of biofuels, may continue totally to exempt those products until 31 December 2003.

Article 8d

1. Products made up of or containing biofuels referred to in Article 8b, used by local public passenger transport, including taxis, and by vehicles operated under the responsibility of a public authority may qualify, under fiscal control, for an additional reduction of a value equivalent to the reduction provided for Article 8b.

2. The limit laid down in the second subparagraph of Article 8c(2) shall not apply in the case provided for in paragraph 1.

Article 8e

The reduction in excise duty applied by Member States shall be adjusted to take account of changes in raw material prices to avoid over-compensating for the extra costs involved in the manufacture of biofuels in the event of a sustained rise in the price of crude oil.

Adjustments shall be made according to the variation in crude oil prices over the previous twelve months. The price variations shall be calculated using the 'Brent dated' monthly average oil price.

Article 8f

1. The reduction provided for in Article 8b may be granted under a multiannual programme by means of an authorisation issued by an administrative authority to an economic operator for more than one calendar year. The reduction authorised may not be applied for a period of more than six consecutive years. This period may be renewed.

2. As part of a multiannual programme authorised by an administrative authority prior to 31 December 2010, Member States may apply the reduction under Article 8b after 31 December 2010 and until the end of the multiannual programme, no renewal being permitted.

Article 8g

Member States shall communicate to the Commission the schedule of excise duty reductions applied in accordance with point IIa by 31 December 2002 and every twelve months thereafter.

Article 8h

No later 31 December 2007 the Commission shall report to the Council on the fiscal, economic, agricultural, energy, industrial and environmental aspects of the reductions granted in accordance with this point IIa. Additional exemptions or reductions granted in favour of biofuels according to the procedure of Article 8(4) of Directive 92/81/EEC shall also be reviewed. The Commission shall, if necessary, put forward proposals for their abolition, amendment or extension."

(5) Point IV is hereby amended as follows:

(a) The title is replaced by the following words:

"General and final provisions";

(b) The following Article 9a is added:

"Article 9a

1. The Commission shall be assisted by the Excise Committee set up by Article 24(1) of Directive 92/12/EEC.

2. Where reference is made to this paragraph, the regulatory procedure laid down in Article 5 of Decision 1999/468/EC shall apply, in compliance with Article 7 thereof.

3. The period provided for in Article 5(6) of Decision 1999/468/EC shall be three months."

Article 2

Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 31 December 2002 at the latest.

When Member States adopt those provisions, they shall contain a reference to this Directive or be accompanied by such a reference on the occasion of their official publication. Member States shall determine how such reference is to be made.

Article 3

This Directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Communities.

Article 4

This Directive is addressed to the Member States.

Done at Brussels,

For the Council

The President