EUROPEAN COMMISSION Brussels, 14.7.2021 SWD(2021) 641 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the document Proposal for a Council Directive restructuring the Union framework for the taxation of energy products and electricity (recast) {COM(2021) 563 final}

{SWD(2021) 640 final}

{SWD(2021) 642 final}

{SEC(2021) 663 final}



Table of contents –Carbon Offsetting and Reduction Scheme for International Aviation –1.Introduction: Political and legal context –2.PROBLEM DEFINITION 2.1 What are the problems? 2.2 What are the problem drivers? 2.3 Effective Energy Tax Rates 2.4 How will the problem evolve? –3.Why should the EU act? 3.1 Legal basis 3.2 Subsidiarity: Necessity of EU action 3.3 Subsidiarity: Added value of EU action –4.Objectives: What is to be achieved? 4.1 General objectives 4.2 Specific objectives –5.What are the available policy options? 5.1 What is the baseline from which options are assessed? 5.2 Description of the policy options 5.3 Options discarded at an early stage

–6.What are the impacts of the policy options? 6.1 Baseline 6.2 Impact on environment: GHG and air pollutant emissions 6.3 Impact on the internal market 6.4 Impact on energy tax revenues 6.5 Impact on GDP 6.6 Impact on the labour market 6.7 Macro economic impact under alternative revenue recycling settings 6.8 Impact on industries that are more energy intensive 6.9 Distributional Impact 6.9 Impact on aviation, maritime transport and inland shipping –7.COMPARING THE POLICY OPTIONS 7.1 Comparison of the policy options against selected criteria 7.2 Effectiveness 7.3 Efficiency 7.4 Coherence –8.The preferred policy option –9.How will actual impacts be monitored and evaluated? –Annex 1: Procedural information....................................................................................81 –Annex 2: Stakeholder consultation…………………………………………………...85

–Annex 3: Who is affected and how?...................................................................................98 –Annex 4: Analytical methods.............................................................................................102 –Annex 5: Effective Tax Rates……………………………………………………………...112 –Annex 6: Cost assessment of air pollution………………………………………….130 –Annex 7: Aviation taxation………………………………………………………………..139 –Annex 8: Energy system impact of the central option of the ETD revision (contribution by DG ENER).....................................................................................................147 –Annex 9: Statistical Annex…………………………………………………...……………148 –Annex 10: QUANTIFICATION OF THE INDUSTRIAL ENERGY CONSUMPTION WITHIN THE SCOPE OF ARTICLE 2 OF THE ENERGY TAXATION DIRECTIVE……………………...171

Glossary Term or acronym Meaning or definition CHP Combined heat and power generation CJEU Court of Justice of the European Union CN Combined Nomenclature CORSIA Carbon Offsetting and Reduction Scheme for International Aviation DG TAXUD Directorate-General for Taxation and the Customs Union eAD Electronic Administrative Document for excise goods which are moved under duty-suspension EEA European Economic Area EGD European Green Deal EMCS Excise Movement Control System Energy Taxation Directive Council Directive 2003/96/EC ETD Energy Taxation Directive EU ETS European Union Emissions Trading System EUA European Union Allowance GHG Greenhouse Gas (CO2, N2O, perfluorinated chemicals (PFCs)) Horizontal Excise Directive Council Directive 2008/118/EC JRC Joint Research Centre LPG Liquefied Petroleum Gas Mineral Oils Directives Directives 92/81/EEC and 92/82/EEC NACE European Classification of Economic Activities NOx Nitrogen oxides PM 2.5 Tiny particles or droplets in the air that are two and one half microns or less in width. RED / RED II Renewable Energy Directive / Recast Renewable Energy Directive REF EU Reference Scenario REFIT The Commission’s regulatory fitness and performance programme SAAD Simplified Administrative Document SAF Sustainable Aviation Fuels SO2 Sulphur dioxide TFEU Treaty on the Functioning of the EU UCC Union Customs Code





1.Introduction: Political and legal context The world is facing a profound climate crisis and the challenges of this crisis requires a global response. To meet the objective of a climate-neutral European Union (EU) by 2050 in line with the Paris Agreement , the EU needs to increase its ambition for the coming decade and update its climate and energy policy framework. As laid down in the European Green Deal (EGD), the Commission proposed a new EU target for 2030 of reducing greenhouse gas (GHG) emissions by at least 55% compared to levels in 1990 and the first proposal of a European Climate Law . This new target is based on a comprehensive impact assessment and has been endorsed by the European Council . To deliver on these GHG emissions reductions, the Commission will review and propose to revise where necessary all relevant policy instruments by June 2021. In the Commission work programme for 2021, the revisions and initiatives linked to the EGD climate actions and in particular the 55 % net emissions reduction target are presented under the ‘Fit for 55 Package’. This package will cover in particular the review of sectorial legislation in the fields of climate, energy, transport, and taxation . The initiative for a revision of Directive 2003/96/EC (Energy Taxation Directive or ETD), which is the subject of this impact assessment, is part of that package to be adopted in June 2021. The other initiatives are subject to dedicated and in-depth impact assessments led by the Commission services, and are beyond the scope of this impact assessment. These other initiatives include new proposals and the review of existing acquis in the area of climate and energy policy: •the EU Emissions Trading System (ETS) to potentially include the building, maritime and road transport sectors as well as to change the treatment of the aviation sector, which is already included in its scope; •the Effort Sharing Regulation (ESR) •the Renewable Energy Directive (REDII) ; •the ‘ReFuelEU Aviation’ initiative aimed at boosting the production and uptake of sustainable aviation fuels in the air transport sector; •the ‘FuelEU Maritime’ initiative aimed at increasing the demand of renewable and low-carbon fuels in the maritime transport sector. •the Energy Efficiency Directive to implement the ambition of the new 2030 climate target (EED) •A new Carbon Border Adjustment Mechanism •Reducing methane emissions in the energy sector •the Regulation on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry (LULUCF) •the Directive on deployment of alternative fuels infrastructure •the Regulation setting CO₂ emission performance standards for new passenger cars and for new light commercial vehicles performance of Buildings Directive (EPBD) The EGD sets out a detailed vision to make Europe the first climate-neutral continent by 2050, safeguard biodiversity, establish a circular economy and eliminate pollution, while maintaining the competitiveness of industry and ensuring a just transition for the regions and workers affected. Delivering on the revised target with a coherent policy framework to support implementation across sectors will make industry and businesses ‘trailblazers’. This is expected to modernise the economy, and deliver innovation while ensuring security and resilience of energy supply and health benefits. In this context, effective carbon pricing and the removal of incentives for fossil fuel consumption throughout the EU are very much needed to deliver the GHG emission reductions together with other regulatory measures. The review of the Energy Taxation Directive, as an integral part of the EGD, should focus on environmental and climate issues in order to support the transformation of the EU’s economy for a sustainable future. One major aspect is that all instruments of the EGD need to support and enhance the EU vision of achieving climate neutrality by 2050 in a coherent way. This means it is essential to ensure that taxation is aligned with climate and environmental objectives. In fact, taxation can enhance other key EU policies and help achieve these objectives by creating proper incentives to change behaviour, and to create the right environment for green innovation. The inclusion of enhanced taxation elements in the EGD supporting other policy instruments acknowledges the importance of the “polluter pays” principle, the internalisation of externalities and the role that taxation can play by providing the incentives to further steer behaviour of producers and consumers. While the ETD is historically an instrument for Member States to collect tax revenues, the environmental objective of taxation has gained relevance in the present context. The European Green Deal has underlined that it is essential to ensure that taxation is aligned with climate objectives and that the review of the ETD focuses on environmental issues by putting, in particular, an end to fossil fuel incentives. Therefore, this review is designed to deliver a contribution to meeting the greenhouse gas reduction targets of the Climate Law and to be consistent with the other ‘Fit for 55’ initiatives. The review acknowledges that the main role in the decarbonisation of the EU economy corresponds in any case to the ETS and to the Effort Sharing Decision.

The Climate Law targets could theoretically be achieved without the contribution delivered by the proposed ETD revision. However, as it is considered that the ETD would have to be revised to address a number of shortcomings of the current Directive (e.g. related to the proper functioning of the internal market) and to be focused on environmental issues, it makes sense to consider revising the ETD in such a way as to make it consistent with other ‘Fit for 55’ proposals and deliver a meaningful contribution to the targets of the Climate Law. Without the contribution of the ETD, other initiatives would have to contribute more. This, for example, could result in a higher ETS price. The coordination of the two initiatives (ETD and ETS) can help to achieve the targets in 2030 and beyond in a more cost-efficient way. The ETD can support and complement the initiatives in the ‘Fit for 55 Package’ in contributing to the increased ambition of at least 55% reduction in GHG emissions by 2030 by ensuring that the taxation of motor and heating fuels reflects better the impact they have on the environment and on health. This can be achieved by removing disadvantages for clean technologies and introducing higher levels of taxation for inefficient and polluting fuels. The proposed policy measures in this impact assessment will contribute to the objectives of EU’s climate, environmental and energy policies by providing secure, affordable and clean energy for EU citizens and businesses. Furthermore, it will facilitate the transition away from fossil fuels towards cleaner energy to deliver on the EU’s Paris Agreement commitments for reducing GHG emissions. Box 1: Overview of Directive 2003/96/EC and its rationale compared to the ETS Fuel taxation has been part of the existing national taxation measures well before the existence of the EU Directive of 2003. At present, energy taxes, which in most Member States do not pursue an explicit and well defined CO2 reduction objective, range from 3.5% to 9% of total national revenues. Directive 2003/96/EC lays down the EU rules for the taxation of energy products used as motor or heating fuels and of electricity. Prior to its entry into force in 2003, the Union framework for energy taxation mainly covered mineral oils by means of Directives 92/81/EEC and 92/82/EEC (the so-called “Mineral Oils Directives”). The ETD replaced those Directives retaining their structure based on minimum levels of taxation expressed in terms of volume but widening the scope to avoid distortions between competing sources of energy (such as electricity). It set new minimum rates for the new products under the widened scope and increased the rates for the mineral oils previously covered. The objective of this harmonisation of energy taxation was to avoid the harmful effects of energy tax competition between Member States. This harmonisation ultimately aimed at strengthening the internal market by tackling possible distortions of competition stemming from the relocation of consumers of energy (i.e. businesses) to Member States with more beneficial tax regimes. The ETD also intended to allow Member States to use taxation policy in support of other policies. These include the environmental protection and the achievement of international climate related commitments (at the time of the adoption of the ETD, specifically the Kyoto Protocol), energy efficiency, consideration of transport policies and redirection of fiscal policy to combat unemployment. Since its adoption in 2003, energy markets and technologies in the EU have experienced significant developments, and the EU’s international commitments, including the Paris Agreement, as well as the EU’s regulatory framework in the area of energy and climate change have evolved considerably.



In view of energy efficiency and environmental objectives, in 2011 the European Commission made a proposal aiming at restructuring the energy taxation to reflect both energy content and CO2 emissions, as well as at rationalising the structure of possible exemptions and reductions. Following four years of unsuccessful negotiations in the Council in which Member States were unable to reach a unanimous agreement on the way forward, the European Commission decided to withdraw the proposal in 2015 . The Commission services published an evaluation report of the ETD on 12 September 2019. In the light of this evaluation, the EU Finance Ministers adopted Council Conclusions at the ECOFIN meeting on 5 December 2019 . These conclusions underline that energy taxation can be an important part of the economic incentives that steer successful energy transition, driving low greenhouse gas emissions and energy savings investments while contributing to sustainable growth. Considering the importance of an updated energy taxation framework, the Council Conclusions invited the Commission to analyse and evaluate possible options with a view to publishing in due course a proposal for the revision of the Directive. In particular, the conclusions support an update of the legal framework for energy taxation contributing to the wider economic and environmental EU policy objectives. They invite the Commission to give particular consideration to i) the scope of the directive, ii) the minimum rates and iii) the specific tax reductions and exemptions. The Council also highlighted the importance of fully assessing the proposals in terms of their economic, social and environmental costs and benefits. The implications for competitiveness, connectivity, employment and sustainable economic growth, particularly for sectors most exposed to international competition should also be assessed. The ETD sets minimum levels of fuel taxation according to the different products and uses for energy products used as motor or heating fuel- and electricity, including the sectors in the ETS and/or subject to other standard regulations (such as blending obligations or emission standards for vehicles). While the ETD is a tax on output fuels, the ETS applies a charge to CO2 emissions in some installations. Therefore, the coverage of the two Directives are independent and the two instruments are considered to be complementary. The economic sectors/energy uses can be subject to ETD and ETS at the same time. A certain overlap in the coverage of the two instruments would arise in case the ETD rate is increased to include a CO2 component. In that case, for the sectors simultaneously covered by ETD and ETS, it could be considered that there is a double carbon price. As long as a sector/energy use is taxed with ETD for fuel consumption and charged by ETS for CO2 emissions, no overlap or double taxation would occur between the two instruments. Both instruments cover some uses of energy, such as power and heat generation and energy-intensive industries. Other areas are excluded by either one or both of them. Such, for example, include process emissions, which are covered by EU ETS and not by the ETD. 2.PROBLEM DEFINITION

This section will define and analyse the problems and their drivers and it will assess the expected evolution of these problems in the absence of any EU policy intervention. The section will also present the need for the review of the directive in line with the “Logic for Intervention” below. Figure 1 below presents a snapshot of the main problems, their drivers, and the objectives of the proposed initiative. Figure 1: Logic for Intervention 2.1 What are the problems? At the time of its adoption, the ETD represented a positive contribution to the EU legislative framework by establishing harmonised common rules at the EU level for the taxation of electricity and basically, all motor fuels and heating fuels in 2003. However, the ETD has remained unchanged despite the fact that technologies, energy markets and other EU legislation have evolved considerably over the past 15 years. Consequently, significant misalignment exists between the ETD and all these areas today. The overall conclusion of the evaluation report is therefore that the ETD does not ensure the equal tax treatment of energy sources based on their negative externalities. Such externalities include, for example, the emission of greenhouse gases and other air pollutants. The ETD is not in line with EU climate and energy objectives: The Directive does not adequately promote greenhouse gas emission reductions, energy efficiency and the take-up of electricity and alternative fuels (hydrogen, synthetic fuels, e-fuels, advanced biofuels, etc.). As a result, the ETD does not provide sufficient incentives for investments in clean technologies. There is a lack of alignment between the ETD and, among others, the Renewables Directive and the Energy Efficiency Directive. The treatment of the business sector, in particular energy intensive business and manufacturing sectors, varies considerably under the ETD. Furthermore, the exemptions for the aviation and maritime sectors are incoherent with the push for climate change. For these reasons, the ETD is not in line with the objectives of the EGD, and hence, it cannot ensure at present consistency with the ‘Fit for 55 Package’. The ETD de facto favours fossil fuel use: Highly divergent national rates are applied in combination with a wide range of tax exemptions and reductions in order to pursue national industrial and economic policies. The wide range of exemptions and reductions are de facto forms of fossil fuel incentives, which are not in line with the objectives of the EGD. Furthermore, renewable fuels and energy products produced from biomass (see Box 2 ) are treated less favourable due to their lower energy content. Yet the same minimum tax rate is applied. All these differences increase the fragmentation of the internal market, provide an unequal fiscal treatment of the different fuels and distort the level playing field across the relevant sectors of the economy. Box 2: What are biofuels, bioliquids and biogas? These products are produced from biomass (such as plant or animal material) and definitions of these products in the REDII differentiate between biofuels as liquid fuels for transport, bioliquids as liquid fuel for energy purposes other transport, such as heating and biogas as gaseous fuels*. In the EU most biofuels today are blended with fossil transport fuels. Typically, ethanol is mixed with gasoline and biodiesel is mixed with gas oil. There are three main types of biofuels: i) Non-Sustainable: These biofuels do not achieve significant reductions in greenhouse gases compared to fossil fuel alternatives and/or the cultivation of their feedstock results in land use conflict (food security, land with high biodiversity). ii) Sustainable**: these biofuels achieve a certain reduction in greenhouse gases compared to fossil fuel alternatives and does not result in land use conflict. iii) Advanced*** : Beyond complying with the sustainability and greenhouse gas saving criteria listed above, advanced fuels are produced from feedstock that ensure that they do not create additional demand for land while promoting the use of wastes and residues.

Bioliquids include e.g. vegetable oils and fats and are also subject to the above sustainability criteria. Biofuels and biogas for transport are also eligible to be treated as advanced. * As defined by Article 2 (24), (28), (32) and (33) of Directive (EU) 2018/2001 of the European parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (recast; REDII) **As defined by Article 29(2) to (7) of RED II excluding high indirect land-use change-risk biofuels as defined in Article 26(2) of that Directive. *** As defined by Annex IX Part A of Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (recast) The ETD is no longer contributing to the proper functioning of the internal market: The current ETD no longer achieves its primary objective in relation to the proper functioning of the internal market, as the minimum tax rates have lost their converging effect on national tax rates. In the absence of an indexation mechanism, their real value has eroded over time and they no longer have a converging effect on national rates as the vast majority of Member States tax most energy products and, in some cases electricity, considerably above the ETD minima. Highly divergent national rates are applied in combination with a wide range of tax exemptions and reductions in order to pursue national policies. The wide range of exemptions and reduction are de facto, forms support to fossil fuel consumption. These concern important sectors, such as aviation and maritime transport that are currently fully exempt from energy taxation, while land transport bears an important burden of energy taxation (except for leisure flights). All this increases the fragmentation of the internal market in particular distorts the level playing field across the involved sectors of the economy and creates unfair tax treatment. In addition, there are some aspects of the ETD that lack clarity, relevance and coherence, which creates legal uncertainty. These include, among others, the definition of taxable products and uses that are out of the scope of the Directive and the interpretation of the exemption related to motor fuels used in air and water navigation. The ETD has historically been an instrument for Member States to collect tax revenues. On average, ETD revenues represent around 5% of total tax revenues in the EU. From an economic perspective, indirect taxes can raise revenues in a less distortive way than direct taxation, because they have a less detrimental impact on growth. During the last decades the Commission has strongly encouraged Member States to make more use of indirect taxes as compared to direct taxes, especially labour taxation. Considering the projected evolution of the energy system under existing climate and energy policies, duly attention has to be given to the expected tax revenues evolution and their stability over time. In fact, a trade-off between environmental objectives and revenue stability may arise if the tax succeeds in internalising environmental costs thus contributing to reduce the taxable basis and namely fossil fuels use. While the aim of this review is not to increase revenues from the tax, it is one of the objectives to preserve the revenues raising potential for Member States (according to their policy choices in the area of taxation) at the same time that the tax ensures a reduction of negative externalities. The reduction of negative externalities and the preservation of revenues potential are not contradictory objectives. This can be achieved by means of the revision of the minimum rates and the broadening of the taxable base. 2.2 What are the problem drivers? A)Related to the tax rates A.1 Outdated relevance of the converging role of the minimum rates level over time In the absence of an indexation mechanism, the real value of minimum rates has eroded over time. The 2019 Evaluation observes that the absence of an increase in minimum rates for more than a decade at EU level has eroded the tax-induced price signal that was supposed to encourage the convergence objective imbedded in the harmonisation and internal market logic of the Directive. As a result the national rates are generally well above the fixed minima and are very different at national level. As an example, the petrol real value of the minimum rate has decreased of around 2/3 since 2003 (CPI indexation). As most Member States have increased their national level of taxation since then while others have not, there is risk of growing distortion of competition in the Single Market and an erosion of the tax base in high-taxing countries, notably for motor fuels that can be easily and legally transported across borders. This situation has eroded the convergence logic of the harmonisation Directive. The minimum level of taxation for unleaded petrol already existed under the Mineral Oils Directives of 1992, with a rate fixed at EUR 287 per 1 000 litres. With the entry into force of the ETD, this minimum level of taxation was increased to EUR 359 per 1 000 litres. The ETD raised the minimum level of taxation of gas oil used as propellant from EUR 245 to EUR 302 per 1 000 litres in 2004, and to EUR 330 per 1 000 litres in 2010. The implementation of the ETD had an initial one-off converging effect. The initial approximation of rates was strongest for the countries joining the EU after 2004. At the time of the ETD adoption, 14 out of the 15 EU Member States were already taxing unleaded petrol above the new minimum, while at the time of accession all but three of the 13 post-2004 Member States were below the minimum levels of taxation. For gas oil used as propellant, nine EU-15 Member States were taxing it above the new minimum against five of the post-2004 countries. Therefore, the minimum levels of taxation applicable to motor fuels under the ETD provided a safety net to avoid a “race to the bottom” in the taxation rates applied by the Member States. The contribution of the current minimum levels applicable to petrol and gas oil, to the smooth functioning of the single market by approximating excise duty rates, is limited by the possibility of setting national rates above the minimum levels defined in the ETD, resulting in highly divergent national rates for transport fuels. Final prices across the EU ranged in 2018 from 1.10 EUR/litre to 1.68 EUR/litre. Most of the difference results from taxation as the variation of commodity prices remained between 0.53 to 0.66 EUR/litre in 2018 [1]. The variation of the tax component was significantly higher, ranging from 0.36 to 0.78 EUR/litre. These differences induced a phenomenon of consumers crossing borders in order to refuel their vehicles at lower prices (tank tourism) in bordering regions. This indicates local distortion of competition. The 2019 evaluation (annex 6) shows the per capita releases for consumption of petrol and gas oil in each Member State. Significantly higher values in certain Member States might indicate the practice of tank tourism Figure 2: National Tax Rates and current ETD minimum rates in 2020)





Source: TEDB A.2 Taxation of fuels continues to be based on volume The taxation of fuels according to volume and not according to their energy content discriminates against renewable fuels in favour of conventional fossil fuels. The fiscal treatment of new energy products and technologies is unclear. The lack of sustainability criteria and classification in the ETD to ensure that the use of biogas and liquid fuels produced from biomass in transport and such fuels used for heating is done in a way that guarantees real carbon savings and protects biodiversity, hampers the consistent tax treatment of these biomass fuels. The taxation of them under the ETD, like for almost all fuels, is based on volume and the applicable rate is the same as the rate applicable to the equivalent fossil fuel. The ETD, therefore, fails to take into account the lower energy content of the renewable fuels leading to a higher tax burden on the renewable fuel compared to the same volume of the competing fossil fuel. As a result, as biofuels used for transport is to be taxed at the national tax rate applicable to the equivalent fossil fuel – being fossil petrol or gas oil expressed in volume units – this means that the same distance travelled with biofuels is more heavily taxed. Moreover, the taxation according to volume also results in unjustified differences of the taxation among different fossil fuels, such as petrol and diesel and among different products for heating use (see figures below). Figure 3: Minimum tax structure - heating and motor fuel use (2003 minimum rates) Source: Commission (JRC) calculations on Eurostat data A.3 Outdated coverage of energy products The ETD is outdated. The EU's energy mix is continuously evolving, as reflected also in the overall ‘Fit for 55 Package’, with the deployment of renewable energy and the decrease of the use of fossil fuels as a direct consequence of the policy choices made since the signature of the Kyoto protocol. The share of renewable energy in the EU's energy mix has increased almost three-fold since the ETD was adopted. Despite the growing market relevance of renewable fuels, their tax treatment under the ETD still relies on rules developed at a time when these fuels were niche alternatives without major market significance. It is a fact that the ETD does not provide clear provisions for a growing portion of the changing EU’s energy mix. The relevance of the current ETD will further decrease as the ambition of climate policies increases. The 2030 climate and energy framework sets a target of at least 32% share for renewable energy .

Figure 4: EU27 energy mix by type of fuel Source: Eurostat [nrg_ind_ren] The ETD was adopted long before the emergence of new technologies and uses that are predicted to become important building blocks on the path to the EU's decarbonised future. At the time of the adoption of the ETD, biofuels in transport were immature products, limited in variety and significance. However, over the last one and a half decades, second and third generation biofuels emerged. The environmental performance of these successive generations of biofuels kept improving. Yet, the ETD does not differentiate between these types of biofuels. Alternative fuels, such as hydrogen , e-fuels , synthetic fuels, bio-methane and renewable fuels of non-biological origin are gaining traction. However, the ETD does not ensure a tax treatment of these low-carbon alternatives, which is coherent with their potential to reduce GHG emissions, therefore constituting a disincentive for their higher penetration in the EU. The ETD does not even provide clear legal provisions for the taxation of some of these new products. Because of all this, the current ETD is not properly suited to ensure the preferential treatment of these new energy products and their applications. B)Related to the tax base B.1 Coverage limited by the out of scope provision Article 2 (4) (b) of the ETD lists certain energy products as well as uses of energy products and electricity for which the Directive itself shall not apply, apart from the application of the control and movement provisions laid down in Article 20. Such out of scope uses are as follows: I)any uses other and as motor fuel or as heating fuels, II)the dual use of energy products (such as the use of energy products for chemical reduction, electrolytic, or metallurgical processes), III)the use of electricity when it accounts for more than 50% of the cost of a product, and IV)mineralogical processes. However, Member States remain free to subject these uses to non-harmonised taxation although in practice very few do so. The current ETD provides short definitions only for dual use and mineralogical processes, leaving sizeable room for interpretation and legal uncertainty. According to a dedicated modelling exercise by DG Joint Research Centre of the European Commission (see Annex 10), 68% of the EU’s industrial energy consumption falls under the out of scope provision and is therefore not subject to harmonised taxation. As most Member States opt not to apply non-harmonised taxation, most “Out of scope” energy use is untaxed. The impact of the provision however varies significantly across industrial sectors and Member States. The estimated share of “Out of Scope” energy use is the highest in the following sectors:

I)“Non- metallic minerals”, including the production of building materials clay, sand and limestone (almost all of the sector’s energy consumption falls under the Out of Scope provision). . II)“Iron & Steel” (depending on a country’s national definitions, over 90% of the sector’s energy consumption can fall under the Out Of Scope provision) III)“Non-ferrous metals”, including the production of aluminium, zinc and copper (over 80% of the sector’s energy consumption falls under Out of Scope) (Other industrial sectors, such as “Food and beverage” and “Textile and leather” benefit less from the provision, leaving about three quarters of the energy consumption in these sectors in the scope of the ETD. (see more detailed results in section 3 of Annex 10). Although the ETD sets the same definitions for all, differences across Member States arise depending on the prevalence of production processes in each country’s value chain. Some Member States process raw materials, with these processes being the most energy intensive part of the production, and export the product to other Member States. Consequently, the share of untaxed Out of Scope uses will be higher in the exporting country. In the “Chemicals” sector for example, the share of Out of Scope energy use varies from 12% to 66% across Member States. B.2 Presence of sector-specific energy tax exemptions or reductions The presence of sector-specific energy tax exemptions or reductions, notably for the transport sector (aviation, maritime, inland shipping and road haulage), for the agricultural/ forestry/aquaculture sectors and for the energy-intensive industries and other business sectors, substantially weakens the incentives for investing in more energy-efficient and less polluting capital stock and production processes in these sectors. As a result alignment and consistency of the current ETD with the European Green Deal is weakened and does not allow to make these sector contribute to the decarbonisation effort. At present, the ETD provides for an exemption of energy products supplied for air navigation and navigation in Community waters, other than for private pleasure purposes. Even if Member States may limit the scope of the exemptions to international and intra-Community transport by taxing these sectors domestically or after having entered into a bilateral agreement with another Member State to waive the exemption, the reality is that exemptions remain. These exemptions offer these sectors a favourable tax treatment in the transport sector as road transport is not exempted and the exemption of rail transport is optional. Moreover, the present situation substantially weakens the incentives for investing in more energy-efficient and less polluting crafts. The lack of proper differentiation between the different fuels in these sectors covered by the mandatory tax exemptions does not facilitate reducing the significant price difference between fossil fuels and sustainable fuels. Properly designed taxation measures could support the uptake of sustainable fuels and at the same time their production what could result in lower prices for these fuels. Concerning, more particularly the aviation sector, it is worth considering that even after the drop caused by COVID-19 in 2020 and successive years, under the baseline scenario CO2 emissions from aviation are still forecast to increase by 24% by 2030 and by a further 27% by 2050 compared to 2005 levels . This highlights the fact that, together with the increase in demand, the current exemption / structure does not encourage the switch to less polluting aircraft or fuels. Existing market-based instruments, the EU ETS for intra-EEA aviation and since January 2021 the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) only partially internalise climate externalities. For intra-EEA flights, climate change impacts are currently not fully internalised through the EU ETS as a significant proportion (44% in 2019) of total verified emissions are allocated for free to aircraft operators. This, however, is reassessed in the revision of the EU ETS, where a reduction of the number of the free allocations is among the policy options considered. As for extra-EEA flights, the price signal provided by CORSIA clearly falls below the EU ETS carbon price and would only marginally reflect the climate external costs generated by extra-EEA flights. See Annex 7 for more details about the analysis for this sector. While the problems of increasing GHG emissions and expensive decarbonisation supply measures equally apply to maritime and inland shipping, no market-based instruments are currently applied in this sector. Moreover, similarly to the case of the aviation sector, the exemption of the maritime and inland shipping gives a preferential energy tax treatment to the sector with respect to other modes of transport. Lower minimum levels for products used as motor fuels are applicable in the agriculture sector (which can moreover enjoy a level of taxation down to zero, for energy products as well as for electricity), and to stationary motors and machinery for construction and public works. Energy intensive industries and other business sectors can, when in compliance with State aid regulations, also benefit from tax reductions potentially down to zero. This is possible under certain conditions, such as qualifying as an energy-intensive business (as defined by the ETD), and/or where agreements, tradable permit schemes or equivalent arrangements are implemented, as far as they lead to the achievement of environmental protection objectives or to improvements in energy efficiency. The national implementation of these provisions varies among Member States and across economic sectors. B.3 Extensive and highly divergent use of optional tax differentiations, reductions and exemptions The ETD leaves room for the Member States to implement total or partial exemptions or reductions in the level of taxation. The effective application of optional differentiations often reflects the individual interests of Member States. The extensive and highly divergent use of optional tax reductions and exemptions by Member States fragments the internal market and in particular distorts the level playing field across the respective sectors of the economy. There is a disconnection – and in some cases, a contradiction – between some optional tax exemptions and reductions allowed by the ETD and other EU instruments for energy and climate. The following list provides an overview of the main (possible) differentiations other than those already described in the previous section:

·possibility of differentiated rates of taxation above the minima (e.g. when linked to product quality, or depending on quantitative consumption levels for electricity and energy products used for heating purposes or between business and non-business use for heating fuels and electricity, etc.); ·possibility of lower rate for the commercial use, as opposed to non-commercial use, of gas oil used as propellant for the carriage of goods or of passengers; ·tax exemption for energy products and electricity used to produce electricity, with a possibility, within defined limits, to introduce a taxation for reasons of environmental policy; and optional total or partial tax exemption or reduction for electricity from certain sources (including, among others, electricity from solar, wind, wave, tidal or geothermal origin); ·possibility of total or partial exemption or reduction in the level of taxation for energy products and electricity used for producing heat in combined heat and power generation and for electricity produced from combined heat and power generation (provided that the combined generators are environmentally friendly); optional total or partial tax exemption or reduction for natural gas and LPG used as propellants (moreover, for LPG, as well as for kerosene, used as heating fuels, the minimum level of taxation applicable is zero); ·country specific minimum levels , as well as additional derogations for specific policy considerations, when requested by a Member State, which granted by means of a Council Implementing Decision. Such measures are of a diverse nature, and include among others: specific rates for specific geographical areas, the tax treatment of electricity directly supplied to vessels at berth in a port (“shore-side electricity”) or to electricity supplied to electrical vehicles at charging stations and a tax exemption to operate machinery in humanitarian demining or for low-value solid fuel. Beyond the discretionary application of tax differentiations, exemptions and reductions, the implementation of other provisions may also undermine the objective of harmonisation. Such include: legal uncertainty in the application of the control and movement provisions and the definition of the conditions establishing, in certain cases, chargeability and chargeable event. A divergent interpretation and implementation of these provisions may be an obstacle to the free movement of goods and investment capital. As regards the control and movement provisions, an update of the list of energy products to which those provisions apply may be needed. While several attempts to amend this list for various reasons including the fight against tax fraud have been made, this has not been successful to date and as a result national solutions have been implemented. Concerning chargeability and chargeable event, particularly for storage of electricity, the current ETD was adopted long before several storage technologies (including chemical, electrical and mechanical solutions) emerged. Therefore, its provisions leave the possibility of divergent national implementation open. The ETD states that electricity is taxed at the time of supply but does not clearly define whether electricity is released for consumption when supplied to storage facilities. This could open the possibility of double taxation of electricity that is stored and re-sold. The lack of EU-wide harmonisation could create an insecure environment for business, and consequently might hinder investment in storage technologies.



2.3 Effective Energy Tax Rates This section complements the definition of the problems by means of synthetic indicators, which summarise the main findings presented above in terms of problems arising from the present level of rates and definitions of the taxable base. As mentioned above, much of the EU’s energy consumption is not taxed at the nominal levels listed in the national legislations. Effective rates do not result from a single problem driver identified in this Impact assessment, nor do they reflect the shortcomings resulting from a single problem driver. Effective rates are a combined result of the national tax rates applied jointly with the use of sectoral and other tax exemptions and reductions, the highly divergent national criteria attached to benefiting from these tax reliefs and eroded minimum rates that allow for large differences across national effective rates. Effective tax rates are best suited to serve as the basis for policymaking. In fact, effective tax rates are synthetic indicators, which present nominal rates adjusted for tax reliefs and thereby allow for cross country comparisons. Effective rates also illustrate the prevalence of fossil fuel incentives, counterproductive to the goals of the Fit–for-55 package and source of possible distortions -in the internal market. Consequently, effective rates cannot be derived from a single problem driver. As they represent shortcomings stemming from various features of the current ETD, they also represent the underlying reasons for a number of elements of the new tax design. A wide range of energy consumers benefit from various tax reliefs, in the form of rebates, refunds, differentiation and exemptions. This Impact Assessment delivers a systematic overview of tax reliefs in the EU27, quantifies tax reliefs in the transport, agriculture, households, services and industry sectors and computes set of effective tax rates. In addition, the criteria attached to tax reliefs are inventoried. (See Annex 5) . The difference between nominal and effective rates show that the tax burden eventually born by consumers- can vary significantly. The tax effectively paid can be modified in two ways. Firstly, by altering nominal tax rates. In other words, increasing or decreasing the rates applied to energy products and uses. Secondly, by altering the taxable base. This can be achieved by changing the list of beneficiaries or eligibility criteria attached to tax reliefs. Changes in effective rates measure the impact of policy intervention affecting the taxable base, the nominal rate or both. Therefore, it is important to use duly computed effective tax rates to measure the impact of proposed policy changes. Effective tax rates, unlike their nominal counterparts, also allow for cross-country and cross sector comparison. Therefore, the effective tax rates are also the best indicators to summarise the shortcomings of the current ETD and consequently the drivers for its revision. While nominal rates themselves provide no clear indication for the environment or internal market related problems of the EU’s current energy tax design, effective rates can serve the purpose. They illustrate the ETD’s shortfalls in terms of preserving the EU’s internal market as well as contributing to the 2030 targets and climate neutrality by 2050 in the context of the European Green Deal. In fact, effective rates demonstrate harmful fossil fuel incentives in the form of sector and use specific tax reliefs and show the real differences in energy taxes paid by consumers across Member States. For example, only a combination of nominal rates and applicable tax reliefs provides an accurate picture of distortions of the internal market by illustrating the differences in taxes paid by industrial consumers in different Member States. Findings presented in this Impact Assessment are based on answers given by 28 Finance Ministries to a dedicated survey conducted by the Commission in early 2020 (the 27 Member States and Norway). TAXUD Energy Metadata Survey (TEMS) allowed the collection of systematic information on tax reliefs and the national criteria attached to their application. TEMS also covered the taxation of various environmentally friendly technologies that are important drivers of the blocks energy transition. Amongst them, hydrogen, energy storage and renewables. In order to keep the reporting burden low for Member States, the survey was designed to be complemented by external data sources. Most notably, Taxes in Europe Data Base and Eurostat energy balances. CO2 taxes, in the Member States that apply such a tax, are accounted for in the computation of the effective tax rates . As an example, the following graphs illustrate the effective tax rates for the most relevant energy product in agriculture, households and transport. They show the difference between nominal and effective tax rates, whereas tax reliefs are marked in yellow.

The ETD allows Member States to tax the use of gas oil in the agriculture sector below the minimum, including full tax exemption. Some Member States make use of this provision (all yellow bars) while others apply the nominal rate (all blue bars). Yet others apply a refund or rebate (mixed bars) that decreases the effective rate compared to the nominal rate, while respecting the minimum. The result is a highly divergent taxation of gas oil, which accounts for over half of the sectors’ energy consumption. Tax reliefs for the use of gas oil may increase fuel use and represent fossil fuel incentives, hindering the achievement of the EU’s 2030 environmental goals as well as to reach climate neutrality by 2050. Figure 5: Effective Rates for Gas Oil Use in Agriculture . 2019/2020 Source: TEMS The ETD also allows for the differentiation of non-commercial and commercial use of gas oil in road transport, with the latter covering the transport of goods and passengers. As of early 2020, ten Member States made use of this provision, mostly in the form of refunds that haulage operators can apply for. Tax reliefs for the use of commercial gas oil push the rates down towards the ETD minimum and therefore do not have a significant negative impact on the functioning of the internal market, yet they remain an incentive for fossil fuel consumption, incentivising the use of a highly polluting, mostly imported energy product. Figure 6: Effective Rates for Commercial Gas Oil in Road Transport, 2019/2020 Source: TEMS The ETD does not define minimum rates for households nor for industry. Instead, while setting separate minimum rates for the business and non-business use, these rates are the same for gas oil, heavy fuel oil, kerosene and LPG and only differ for electricity, natural gas and coal. Households fall in the “non-business” category. Yet, “non-business” nominal rates are often no indication of the actual rates paid by households. When nominal rates are combined with optional tax reliefs, the resulting effective rate for household electricity use is zero in eight Member States. Seven Member States exempt natural gas from excise duty. Others grant exemptions and reductions based on regional or social grounds, for example to vulnerable consumers. Tax reliefs for the household consumption of natural gas, coal and partly for electricity may increase fuel use and are fossil fuel incentives that constitute further challenges to realising the EU’s environmental and climate agenda. Figure 7: Sector-wide effective rates of household electricity consumption 2019/2020 Source: TEMS 2.4 How will the problem evolve? The Evaluation of the ETD concluded that: “The adoption of the ETD represented a positive contribution to the EU legislative framework in 2003 by updating and widening the scope of the harmonised common rules at the EU level for the taxation of energy products used as motor and heating fuel and of electricity……….. The ETD initially made an overall positive contribution towards its main objective of ensuring the proper functioning of the internal market, preventing double taxation or any distortion of trade and competition between energy sources and energy consumers and suppliers.

However, as technologies, national tax rates and energy markets evolved over the past 15 years, the ETD in its present form no longer makes the same positive contribution. Furthermore, the EU legislative framework and policy objectives developed significantly since the adoption of the ETD in 2003. As the ETD has not kept pace with such developments, there are some aspects of it, that now lack relevance and coherence. As a result the overall EU added value of the ETD has eroded significantly over time in particular due to the lack of indexation of the minimum rates and the extensive and highly divergent use of optional tax exemptions by Member States and because of the changing policy environment” Therefore, considering the already obsolete nature of the Directive and the challenges the EU is facing in terms of climate change, the ETD will become more and more irrelevant in view of its objectives in case of no action. The present problems will evolve further and the ETD will become a patchwork of national legislations aimed at collecting revenues in a non-coordinated way with no effective harmonisation nor any environmental role. In such a situation, considering the evolving of the energy mix and the lack of effective harmonisation, the ability for Member State to effectively collect revenues could also be put under stress. As explained later on in this analysis, revenues for EU27 from this tax are expected to considerably drop in the medium term. 3.Why should the EU act? 3.1 Legal basis The legal basis of the Energy Taxation Directive is Article 113 of the Treaty on the Functioning of the European Union (TFEU), which permits the EU to lay down harmonised rules in order to ensure the proper functioning of the internal market. Additionally, appropriate provisions of fiscal nature intended, inter alia, to preserve and protect the environment can be adopted according to Article 192(2), first subparagraph, of the TFEU. 3.2 Subsidiarity: Necessity of EU action The problems identified can only be remedied by means of a revision of the ETD, in coordination with other EU policy measures. Under the existing ETD, Member States can increase the rates of their taxes on energy products and electricity, decide not to make use of possible exemptions and reductions or introduce environmental and climate related objectives. However, such national approaches risk distorting the internal market and undermining the EGD objectives due to the non-harmonised structure and level of the national taxes: (1)The current minimum rates may limit the level of environmental ambition that Member States can pursue with taxes on energy, in particular because energy taxation may directly affect the costs for companies. (2)The harmonisation of energy taxation through the Energy Taxation Directive should contribute to reducing the harmful effects of energy tax competition between the Member States, stemming for example from the possible relocation of businesses to Member States with more beneficial tax regimes. (3)The EU Emissions Trading System (ETS) has proven to be an effective tool in reducing greenhouse gas emissions from installations covered by the scheme. A possible extension of the EU ETS to new sectors is envisaged in the EGD, but no decision of such a proposal has yet been taken at the time of the completion of this Impact Assessment Report. However, regardless of the scope of the EU ETS, the ETD needs to provide complementary policy actions, notably relating to transport, energy and other sectoral policies, to ensure that the EU incentives align and incentivise further investments in clean energy technologies and infrastructure or to overcome financing difficulties for low-income households. In that context, action at EU level can ensure the coherence between the application of the EU ETS and the taxation of energy products and electricity, as well as a common EU approach with respect to taxation of energy products including carbon taxes in the sectors not covered by the EU ETS. (4)Climate objectives can be put into practice in a number of ways and an effective EU-taxation framework can, while supporting other EU policy measures, prevent the creation of national solutions, which can in turn lead to internal market distortions and/or double taxation. 3.3 Subsidiarity: Added value of EU action The contribution of taxation to the EGD climate and environmentally-related objectives can be ensured most adequately at the EU level. In fact, only a harmonised framework can help to attain the EU levels of ambition in these areas while seeking to preserve both the competitiveness of the productive sectors and the adequate level playing field among sectors and energy uses. Similarly, the EU’s contribution to achieve higher climate ambitions globally international) will be most effective if the EU coordinates all the possible policy instruments, including taxation, in the context of an ambition plan, which encompasses also the extension of the ETS and other relevant policy actions. 4.Objectives: What is to be achieved? 4.1 General objectives The general objectives of the review of the Directive are: I.Contributing to the EU 2030 targets and climate neutrality by 2050 in the context of the European Green Deal. This would involve aligning taxation of energy products and electricity with EU energy, environment and climate policies thus contributing to the EU efforts to reduce emissions and other harmful effects due to the use of fossil fuels. The alignment of the ETD objectives with climate policies should be pursued while ensuring the coherence with the ETS system, thus avoiding inconsistencies and overlaps. II.Preserving and improving the EU internal market by updating the scope and the structure of rates as well as by rationalising the use of tax exemptions and reductions by Member States. III.Preserving the capacity to generate revenues for the budgets of the Member States. It should be underlined that one of the main objectives of taxation is to provide sufficient revenues for investment in public goods. However, it should be clarified that it is not an objective of the review of ETD to ensure at least the same level of revenues in the coming years. The objective is to ensure a framework that allows Member States to be able to generate the revenues they estimate necessary in full coherence with the EGD objectives and also be able, within the ETD framework, to design their tax systems to successfully support these objectives. The ETD revision should therefore duly consider the existing trade-off between a shrinking taxable base due to successful environmental objectives and the need to contribute to the financing of our social models.

In fulfilling the above-mentioned objectives, their implications for competitiveness, connectivity, employment and sustainable economic growth should be carefully considered. The respondents to the open consultation undertaken by the Commission (see Annex 2) share the general objectives of the review. More than 90% of them agree that the ETD has to be revised in order to better ensure the smooth functioning of the internal market. An overwhelming majority of the respondents agree that the ETD should be revised in order to support the transition towards climate neutrality and a strong majority agreed that it has to be revised in order to better tackle environmental concerns, like air pollution. 4.2 Specific objectives The specific objectives of the review of the Directive are: ·Contributing to the reduction of emissions and ensuring consistency with Fit for 55 Package and other relevant policies of the EGD ·Enhancing the relevance of the structure and minimum rates of the ETD by taking into account energy efficiency and ensuring that the system of minimum rates remains up-to-date ·Streamlining the product coverage of ETD ·Reducing fossil fuel dependency ·Ensuring equal tax treatment across modes of transport. A strong majority of respondents to the public consultation agree that the ETD: ·should take into account energy content in the definition of rates (65% of citizens and more than 80% of other stakeholders), ·has to be revised in order to take into account the changed energy mix with higher share of renewables and electricity (more than 90%), ·should better promote energy saving/efficiency (more than 85%), ·de facto favours fossil fuels consumption (51% of businesses and more than 83% of other stakeholders) and should reduce the possibility of favouring fossil fuels via tax reductions, exemptions and rebates (65% of businesses and more than 85% of other stakeholders), ·is applied in a too diversified way across the Member States (85% of businesses and more than 95% of other stakeholders). In contrast, only around 20% of the respondents to the public consultation agree that minimum tax rates of energy products and electricity should be indexed yearly. 5.What are the available policy options?

5.1 What is the baseline from which options are assessed? The baseline for this impact assessment represents the existing 2030 climate and energy legislative framework, namely the agreed climate and energy targets, as well as the main policy tools to implement these . It is aligned with the latest available version of the new EU REF Scenario . This includes primarily climate and energy legislation (ETS Directive, the Effort Sharing and LULUCF Regulations, the Energy Efficiency and Renewable Energy Directives), and notably reflects the European Commission’s current assessment of Member States National Energy and Climate Plans (NECPs) as required in the “Clean Energy for All European Package”. This baseline (EU REF scenario) is expected to also be the baseline of the subsequent exercises under the ‘Fit for 55 Package’ this year. At EU27 level, the baseline achieves a 43.7% reduction in total GHG emissions (domestic and intra-EU maritime, inland shipping and aviation) in 2030, relative to a 32.6% reduction already achieved in 2020. As part of the “Fit for 55 Package”, the Commission is reviewing this climate and energy framework to achieve the new GHG emission reduction target of at least 55% by 2030. However, this evolving policy framework is under consideration at the moment of the preparation of this impact assessment and is not part of the baseline scenario. In addition to the above, the baseline should reflect as close as possible the actual energy taxation levels in Member States in implementing the current ETD. In order to more accurately address this requirement the baseline was updated and recalibrated with the set of effective tax rates applied by Member States, as presented in section 2.2.1, and the relevant technical discussion in Annex 5 (Effective Tax Rates by DG TAXUD) and Annex 10 (Out of Scope by DG JRC). These effective rates were further improved to derive effective tax rates in the sectoral/fuel dimensions of the core model employed for the quantitative analysis of the impacts, namely the JRC-GEM-E3 model. This is particularly relevant for industrial sectors, for which effective tax rates must account for the volume of energy consumed out-of-scope of the Directive. The methodological approach to this further processing of the effective rates is discussed in detail under Annex 4 (Analytical Methods). The baseline outlined above allows the analysis of this impact assessment to explore how the ETD revision will impact upon the EU economy both in aggregate and by Member State, as well as critically asses how the proposed changes can contribute to emission reductions in view of the EU’s increased climate ambition by 2030. By focusing the analysis against the existing 2030 climate and energy legislative framework we can isolate the impact of the ETD alone and thereby its own contribution to reach 55% emission reductions by 2030. Alternative pathways to achieve 55% emission reductions by 2030 are not explored in this impact assessment, as these are analysed by other exercises under the ‘Fit for 55 Package’, including the extension of the ETS to transport and buildings performed by other Commission services. For the purposes of the analysis, the revised ETD is assumed to enter into force in 2023. The JRC-GEM-E3 model runs in 5-year steps, meaning that starting from today an equilibrium is achieved at goods and services markets, and for factors of production through adjustments in prices. As a result, the first visible impact on tax rates of the revision can be seen from 2025 onwards. The methodology and data source used to calibrate effective rates that fed into the modelling of economic impacts is shown by table 17. (See Annex 5). 5.2 Description of the policy options Option 1: “Minimalistic” Option This option would adjust the current minima for all products in line with inflation since 2018 (starting year of indexation). Although the Directive was adopted in 2003, adjusting for inflation since then would result in a too significant increase in the minimum rates. Furthermore, the inflation rate since 2018 would reflect the relative stability of the energy markets and overall economic growth in the EU. The minimum rates will be indexed every year on the basis of the annual variation of the Harmonised Index of Consumer Prices (Eurostat). The HCPI is chosen over an energy price index to ensure smoother adjustment to the ETD rates. Energy prices are in general more volatile and subject to unpredictable changes, which limits their usefulness as a basis of indexation. In addition, employing energy prices as the primary the basis of indexation, would have led to an erroneous situation in which any price change due to taxation would feed into the same index, which was used for the indexation itself. In order to improve the legal certainty and to ensure a specific tax treatment, some products such as advanced biofuels and hydrogen would be included in the definition of energy products. The minimum rates for electricity would apply to these products. Finally, this option would imply a stricter application of industrial tax reliefs, coupled –where applicable- to environmental performance, with no possibility for full exemptions or to go below the minima for energy intensive industries and other business sectors. The same limitation with exemptions and need to respect minima would also apply to the primary sector (agriculture, forestry and aquaculture). Furthermore, the current mandatory exemptions for international aviation and maritime transport would be removed and the two sectors would have a zero minimum rate. This would allow Member States to unilaterally tax these two sectors if they so wish without obliging them to do so. Currently exempted households would reach the ETD minimum rates gradually (heating fuels and electricity), by means of an increase of the rates by 1/10 every year (to reach the minimum after ten years). The possibility for a full exemption would be limited only to vulnerable households. Table 1: Proposed minimum tax rates under Option 1 Motor fuels Metric Current ETD minima Start of transitional period (2023)indexed Petrol EUR/ 1000 litres 359,0 385,0 Gas oil EUR/ 1000 litres 330,0 353,9 Kerosene EUR/ 1000 litres 330,0 353,9 Kerosene (aviation) EUR/ 1000 litres 0,0 0,0 LPG EUR/ 1000 kg 125,0 134,0 Natural gas EUR/ GJ 2,6 2,8 Heating fuels plus fuels for agriculture and stationary motors Metric Current ETD minima Start of transitional period (2023) - indexed Gas oil EUR/ 1000 litres 21,00 22,52 Heavy fuel oil EUR/ 1000 kg 15,00 16,08 Coal and coke, business EUR/ GJ 0,15 0,16 Coal and coke, non-business EUR/ GJ 0,30 0,32 Kerosene business and non-business EUR/1000 litres 0,00 0,00 Kerosene agriculture and stationary motors EUR/1000 litres 21,00 22,52 LPG business and non-business EUR/1000 kg 0,00 0,00 LPG for agriculture and stationary motors EUR/1000 Kg 41,00 43,96 Natural gas business EUR/ GJ 0,15 0,16 Natural gas non business, agriculture and stationary motors EUR/ GJ 0,30 0,32 Non- renewable hydrogen EUR/ GJ n/a 0,16 Electricity, advanced biofuels, e-fuels and renewable hydrogen (all uses) Metric Current ETD minima Start of transitional period (2023) -indexed Electricity business EUR/ MWh 0,50 0,54 Electricity non business EUR/ MWh 1,00 1,07 Advanced biofuels and e-fuels EUR/GJ n/a Same as electricity Renewable Hydrogen EUR/GJ n/a Same as electricity Source: European Commission





Option 2a: “Energy content” Option: tax rates based on the energy content of the products and according to their environmental performance as well as a widened taxable base This option would define the minimum rates based on the energy content (in gigajoules) of each product, rather than on the traditional volume basis, which is currently the case for most of the fuels and electricity in the Directive. This provides a better reference to compare different products and eliminates the current possible disadvantageous tax treatment of biofuels. Moreover, as different uses of electricity and hydrogen become more wide-spread, direct comparison of per unit tax rates might be useful. Whereas it is to be noted that the energy efficiency of appliances (for example heat pumps or electric vehicles) might play a bigger role than the fuel price. This ambitious change of measurement would clearly align the ETD with the objectives of the EGD. As part of this option, the proposed new minima would be increased to reflect 2023 prices and would be automatically adjusted each year on the basis of the annual variation of the Harmonised Index of Consumer Prices (Eurostat) as in the first option. Box 3: Proposed minimum rates In 2023, the base value for one unit of energy content is set at 0.15 EUR/GJ, which corresponds to 0.5 EUR/MWh, the lowest minimum rate in the current Directive for electricity . Taking this value, this option proposes that the minimum rates would range from 0.15 EUR/ GJ to 10.75 EUR/GJ without taking inflation into account. These minima increase to 0.16 EUR/GJ to 11.53 EUR/GJ taking inflation into account (indexation), as in option 1 . The indexed rate for petrol in 2023 is set at 11.53 EUR/GJ to ensure consistency with the present minimum rate (indexed) expressed in volume (see table 2). This option will determine that the level of taxation of petrol and of electricity are the two reference values to set all the other minimum rates. This will allow to differentiate rates to provide clear signals to consumers of better performing energy products and technologies. The minimum rates applied to energy products for motor fuel use would be applied to the aviation sector. The maritime and inland shipping sector would be subject to the same minima as those for the primary sector. While both sectors are exposed to carbon leakage, the opportunity for tankering fuel outside the EU is significantly higher in the maritime sector . The relatively low tax rate on the intra EU maritime sector would reduce the economic incentive to purchase fuel outside the EU . Furthermore, the current structure would be simplified by grouping energy products together based on their environmental performance into five categories for motor fuels and four categories for heating fuels (in terms of applicable rates). The same minimum rate would apply to each energy product within a category according to their use. The five categories are: (I)Traditional fossil fuels (including e.g. petrol, gasoil, kerosene) and non-sustainable biofuels, bioliquids and certain solid biomass (II)Kerosene (for motor fuel in aviation) (III)LPG, natural gas and non-renewable hydrogen (IV)Sustainable but not advanced biofuels, bioliquids and certain solid biomass (V)Electricity, advanced biofuels, e-fuels and renewable hydrogen The highest minimum rate would apply to traditional fossil fuels due to their poorer environmental performance compared to other energy products. The minimum rates would decrease (except for kerosene for aviation) for each subsequent category with the lowest minimum rate applied to category (v). Electricity will increasingly come from renewable sources. Increasing the share of electricity in Europe’s energy system is at the centre of the EU’s ambitious plan to completely decarbonise by 2050. This will mean a higher penetration of electricity in transport, heating and industry displacing fossil fuels. In line with this, the minimum level of taxation for electricity is proposed to be set at a lower level for all uses. At the end of a transition period, the categories of energy products would be further reduced to three as category (ii) and (iii) would be merged with category (i) with the rest of the fossil fuels and non-sustainable biofuels. Option 2 ranks the different fuels according to their environmental characteristics primarily without an explicit element that reflects carbon emissions – the latter addressed explicitly in Option 3.

The concept of ‘environmental performance’ and the correspondent ranking of applicable rates takes into account the specific energy characteristics of the different products, their treatment under the current ETD and in the Member States, the expected -or sought-after- evolution of the EU energy mix and more importantly, it mirrors the other proposals in the “Fit for 55 package” (in particular the ETS and RED II) to ensure coherence and contribute to the common objectives. The result is reflected in the differentiated rates expressed in energy content (EUR/GJ). In line with the indications stemming from the EGD initiatives (see e.g. COM(2020) 562 final, Stepping up Europe’s 2030 climate ambition, Investing in a climate-neutral future for the benefit of our people) traditional less environmentally performant fossil fuels would be taxed from the beginning with higher rates. The same would apply to non-sustainable biofuels, bio liquids and certain solid biomass, following the “RED II” logic and definitions ; Kerosene used as motor fuel in aviation - which is mandatory exempted in the current ETD - would be taxed in line with the rates applied to transport, by means of a linear yearly increase, to reach in 10 years the minimum rate . The transitional period is justified by the need to ensure a smooth application of a new tax to the aviation sector, taking also into account the effects of the present crisis situation. LPG and natural gas –which in the current ETD are mostly subject to low or 0 rates-, would have initial applicable rates slightly lower (precisely 2/3) than the (highest) fossil fuel rates, with a linear increase and alignment over a transitional period of 10 years. This takes into account their less polluting impact compared to other fossil fuels (see in this respect e.g. Commission Implementing Regulation (EU) 2018/2066 on the monitoring and reporting of greenhouse gas emissions) and that these fuels have been considered as a sort of ‘transitional’ fuels, i.e. capable to give a contribution to the green transition (in this regard see also the current Directive 2014/94/EU on the deployment of alternative fuels infrastructure -AFID- where both products are included in the definition of alternative fuels for transport).. Analogous considerations would apply to non-renewable hydrogen . As regards Renewable Energy Sources (RES), their expected overall share in 2030 is below what would be needed to cost-effectively and sustainably achieve 55% reduction in GHG. In this context, sustainable but not advanced biofuels, bioliquids and certain solid biomass, following the logic and definitions of RED II, would be adjusted at ½ of the traditional fossil fuel rate . Currently, Member States report in TEDB diversified fiscal treatments of biofuels, ranging from exemption, to reduction, to full rate Moreover, fixing the rates at a new common basis would avoid reported State aid issues. In the last group, for electricity a greater direct electrification of end-use sectors has been taken on board as a relevant objective for decarbonisation (as also highlighted in the above-mentioned COM(2020) 562 final and COM(2020) 299 final, Powering a climate-neutral economy: An EU Strategy for Energy System Integration). For advanced biofuels, bioliquids and biogases -once again following RED II logic and definitions-, (e-fuels and renewable hydrogen ), it has been judged relevant to account for their potential role for decarbonisation, as well as, the fact that they are in pre-commercial phase and deserve support. This is why they deserve a better treatment with the lowest rate; Member States may continue to set their national taxation rates above the new minima. However, Member States must ensure that the environmental performance and use of each product is reflected in their national tax rate by respecting the ranking between the different rates. This would ensure that better performing energy products and electricity would be taxed less than those with poorer environmental performances avoiding inconsistencies across Member States and the Directive losing its relevance. Member States will maintain the flexibility to determine the differences in rates and will not be required to adopt the same “scaling” that is proposed for the minima. By this, they will retain the flexibility to define their different rates within the “ranking” obligation. Table 2: Proposed ETD minima under Option 2a in EUR/GJ Motor fuels Non-indexed Indexed Start of transitional period (2023) – not indexed Final rate after completion of transitional period (2033) – not indexed Start of transitional period (2023)- indexed Final rate after completion of transitional period (2033) - indexed Petrol 10,75 10,75 11,53 13,25 Gasoil 10,75 10,75 11,53 13,25 Kerosene 10,75 10,75 11,53 13,25 Kerosene (aviation) 0 10,75 0,00 13,25 LPG 7,17 10,75 7,68 13,25 Natural gas 7,17 10,75 7,68 13,25 Non-sustainable Biofuels 10,75 10,75 11,53 13,25 Sustainable Biofuels (not advanced) 5,38 5,38 5,76 6,63 Non-renewable hydrogen 7,17 10,75 7,68 13,25 Heating fuels plus fuels for agriculture, stationary motors, maritime and inland shipping (including fishery) Non-indexed Indexed Start of transitional period (2023) – not indexed Final rate after completion of transitional period (2033) –not indexed Start of transitional period (2023)- indexed Final rate after completion of transitional period (2033) - indexed Gas oil 0,9 0,9 0,97 1,11 Heavy fuel oil 0,9 0,9 0,97 1,11 Coal and coke 0,9 0,9 0,97 1,11 Kerosene 0,9 0,9 0,97 1,11 LPG 0,6 0,9 0,64 1,11 Natural gas 0,6 0,9 0,64 1,11 Non-sustainable biofuels, bioliquids and solid biomass fuels (wood and pellets) 0,9 0,9 0,97 1,11 Sustainable biofuels, bioliquids and solid biomass fuels (wood and pellets) 0,45 0,45 0,48 0,55 Non- renewable hydrogen 0,6 0,9 0,64 1,11 Electricity, advanced biofuels, e-fuels and renewable hydrogen (all uses) Non-indexed Indexed Start of transitional period (2023) – not indexed Final rate after completion of transitional period (2033) – not indexed Start of transitional period (2023)- indexed Final rate after completion of transitional period (2033) - indexed Electricity 0,15 0,15 0,16 0,18 Advanced biofuels 0,15 0,15 0,16 0,18 Renewable hydrogen 0,15 0,15 0,16 0,18 Source: European Commission Table 3: Current and proposed ETD minima for Option 2a in current units Motor fuels Current ETD minima Option 2a Start of transitional period (2023) -indexed Final rate after completion of transitional (2033) period - indexed Petrol EUR/ 1000 litres 359,0 385,4 443,2 Gasoil EUR/ 1000 litres 330,0 419,0 481,8 Kerosene EUR/ 1000 litres 330,0 363,2 467,6 Kerosene (aviation) EUR/ 1000 litres 0,0 0,0 467,6 LPG EUR/ 1000 kg 125,0 162,5 280,2 Natural gas EUR/ GJ 2,6 7,7 13,3 Heating fuels plus fuels for agriculture, stationary motors, maritime and inland shipping (including fishery) Current ETD minima Option 2a Start of transitional period (2023) -indexed Final rate after completion of transitional period (2033)- indexed Gas oil EUR/ 1000 litres 21,0 35,1 40,3 Heavy fuel oil EUR/ 1000 kg 15,0 36,7 42,2 Coal and coke, business EUR/ GJ 0,2 1,0 1,1 Coal and coke, non-business EUR/ GJ 0,3 1,0 1,1 Kerosene business and non-business EUR/1000 litres 0,0 13,6 23,5 Kerosene agriculture and stationary motors EUR/1000 litres 21,0 34,1 39,2 LPG business and non-business EUR/1000 kg 0,0 13,6 23,5 Natural gas business EUR/ GJ 0,2 0,6 1,1 Natural gas non business, agriculture and stationary motors EUR/ GJ 0,3 0,6 1,1 Electricity (all uses) Current ETD minima Option 2a Start of transitional period (2023) -indexed Final rate after completion of transitional period (2033) - indexed Electricity business EUR/ MWh 0,50 0,58 0,67 Electricity non business EUR/ MWh 1,00 0,58 0,67 Source: European Commission In addition, this option would extend the scope of the Directive and remove certain differentiations, reductions and exemptions, therefore widening the tax base from the first year. The following would be the main areas of intervention:

·Intra-EU flights within the aviation sector – the mandatory exemption would be removed for this fuel use (see box 4 below) ·Intra-EU maritime and inland shipping sectors – the mandatory exemption of the maritime sector would be removed and the optional exemption of the inland shipping sector would no longer be possible. On the other hand, considering the increasing number of Member States requiring a derogation for the tax treatment of electricity directly supplied to vessels at berth in a port (“shore-side electricity” (SSE)), a possibility for a differentiated tax treatment (not below the minimum level) would be introduced (see box 4 below) ·Some of the “out of scope” processes, such as the use of energy products for mineralogical as well as metallurgical processes other than dual-use, will move to ‘in scope’ ·Industrial tax reliefs – the application of tax reliefs will be more stringent and will be coupled –where applicable- to environmental performance. Full exemption will be no longer be possible and minima for energy intensive industry and other business sectors will be applied ·Lower minimum rates will be applicable on energy products and electricity used in the primary sector with no possibility to benefit from exemptions ·Heating fuels and electricity for households will no longer benefit from rates below the minima, however the possibility for full exemption limited to vulnerable households will be retained ·Solid biomass fuels covered by Combined Nomenclature codes 4401 and 4402 will be included in the scope. ·No possibility of differentiation between commercial and non-commercial use of gas oil ·Combined heat and power generation (CHP). The taxation of the share of input to produce heat in CHP generation would be set at not less than the minimum rates for the product used. The taxation of the share of input to produce electricity would follow the general rule for electricity generation (i.e. optional exemption with the possibility for Member States to tax on the grounds of environmental policy) ·Article 9(2) of the ETD, which provides for lower minimum levels of taxation for gas oil used for heating purposes in three Member States, would be abolished Box 4: Aviation, maritime and inland waterway transport Design of the tax treatment Under this policy option the use of fuel in aviation, maritime (both transport and fisheries) and inland waterway transport will be taxed at harmonised EU minimum rates as far as intra-EU activities are concerned. The tax on kerosene for aviation will be phased in over a transitional period of 10 years. In case of aviation, intra-EU activity is defined as a flight from one EU airport to another EU airport whereas in case of maritime and inland waterway transport it is defined as a voyage from one EU port to another EU port. The concept of intra-EU operations would replace the present concept of navigation within EU waters for maritime. For aviation, the exclusion of international flights from the scope of the revised tax is due to legal reasons as air services agreements with some third countries do not allow the taxation of fuel uplifted by the carriers of these third countries at EU airports . Additionally, the tax treatment of intra-EU cargo only flights calls for special attention due to the special privileges granted to some third country and the number of intra-EU cargo-only flights carried out by these carriers .While similar privileges are also granted to operators from certain third countries for passenger transport; however, for operational reasons (it is often uneconomical to use the same passenger plane for long-range and short-range flights) those privileges have hardly been used. Taxing fuel for cargo-only flights could affect the competitiveness of EU carriers for two reasons. Firstly, US carriers have a significant market share of in the intra-EU cargo market as under the US-EU Open Skies agreement some US cargo carriers are allowed to fly intra-EU flights without restriction. Secondly, the current exemption of US carriers from the taxation of aviation fuel uplifted in the EU for use in international (including intra-EU) flights does not allow the taxation of fuel uplifted by US carriers in the EU. Therefore it would be proposed that fuel uplifted by cargo-only flights also in intra-EU would be exempted from fuel tax, with a possibility for Member States to tax it on domestic flights or by virtue of bilateral or multilateral agreements between them. This would provide for a certain flexibility, for example in case of renegotiation of air service agreements with third countries allowing the introduction of the fuel tax for this market segment as well. The rates for the fossil fuel tax for aviation are based on energy content in line with those applied to the road transport sector. In the study referred to in Annex 7 on aviation, the impacts of various sub options of an intra-EU fuel tax, a ticket tax and a combination of a ticket tax and a fuel tax are analysed. In this study, also a legal analysis and various sensitivity analyses are carried out (e.g. on a possible slower recovery of the sector after the COVID-crisis, the introduction of a blending obligation as proposed in the ‘ReFuelEU Aviation’ initiative and the introduction of fuel tax covering some extra-EU flights to the UK and Morroco ).For maritime and inland waterways, it is proposed to tax the fossil fuels as the agriculture sector. The relatively low rate of the tax and the limitation to intra-EU shipping is designed to reduce the economic incentive to purchase fuel outside the EU . The aviation and the shipping sectors are exposed to different degrees to possible carbon leakage due to tankering or bunkering (whereby fuel is bought outside EU jurisdiction to be used on subsequent intra-EU transport operations). Due to the limited size of the fuel tanks of aircrafts, the opportunities for fuel tankering in aviation are relatively limited and depend on the distance to the third country concerned and the aircraft used. The risk of carbon leakage by tankering fuel outside the EU is much more significant in the maritime sector. Ships, in particular large ships, are able to undertake long voyages on a single bunkering and can carry additional fuel without significantly sacrificing their carrying capacity . Ships carrying out extra-EU transport operations can avoid uplifting fuel in EU ports as they can simply uplift more fuel in third countries and thereby avoid the EU fuel tax . . According to the modelling done for the impact assessment, intra-EU transport will represent approximately 16% of all fuel use in the waterborne transport sector in 2030 .

On the other hand, to be entitled to tax-free bunkering in the EU, vessels would have to justify the need to have access to tax exempt fuel. As an ex-ante conditionality, eligibility for tax-free bunkering would have to be proved by producing the relevant customs documents indicating the next port of call that is located outside the EU. To further strengthen enforcement, ex-post verifications could be carried out based on, for example, the positioning system of the vessels as part of random checks. The rules will be different for fishing vessels in the case of which there are no customs documents to be examined . Interaction with other EU initiatives to reduce GHG emissions The taxation of traditional fossil fuels used in the aviation and maritime sectors complement a possible extension of the EU ETS to the maritime sector and the review of ETS for aviation including an increase of the level of auctioned allowances for aviation and the implementation of CORSIA as proposed in the revision of the EU ETS. Taken together, these initiatives would ensure that also these economic sectors contribute to the financing of the general budgets under the ETD, while under ETS revenues are reinvested into low-carbon technologies, and reinforce the carbon price signal and the economic attractiveness of mitigation measures such as the implementation of energy efficiency measures or the switch to renewable and low-carbon fuels. Both measures can be modelled in a similar way, as a carbon price or a fuel tax. It is worth noting, however, that the price signal resulting from the options considered for application of ETS and CORSIA to aviation emissions are expected to be lower than the impact of the proposed fuel tax in the aviation sector. On the contrary, in the maritime sector, the possible ETS extension would lead to a much stronger carbon price signal in comparison to the proposed fuel tax on bunker fuel. The taxation of traditional fossil fuels used in these sectors is also coherent with the logic of the ‘ReFuelEU Aviation’ initiative aimed at boosting the production and uptake of sustainable aviation fuels in the air transport sector and the ‘FuelEU Maritime’ initiative aimed at increasing the demand of renewable and low-carbon fuels in the maritime transport sector. As the sustainable and low carbon fuels promoted by these initiatives would be taxed at lower rates under the ETD, the gap between the total costs of traditional and sustainable fuels would narrow down over time and the cost of fuel switching would be reduced . As regards the agriculture sector, the current ETD provides for differentiated and lower minima for motor fuels for certain uses, including agricultural, horticultural and piscicultural works, and forestry. The proposed rates are based on the envisaged need to align those minima and the ones for heating fuels in order to provide for a generally consistent treatment. Moreover, the proposed revision envisages the overall need to respect the applicable minima, leading to the removal of the -currently allowed- possible reduction down to zero for energy products and electricity used in the primary sector. Finally, the option will increase legal certainty for all stakeholders: ·To address the risk of fraud and improve the legal certainty, an update or a revision of the list of energy products subject to control and movement provisions may prove necessary (e.g. for lubricating oils) ·Provisions regarding energy storage will ensure that the possible double taxation of electricity, which is stored for consumption at a later stage, is avoided. This option includes a transitional period of ten years (2023-2033) for certain categories of products and uses to provide stakeholders with a clear price signal trend for the next years in order to adapt investments and technologies. Some relevant examples are: ·The tax on LPG, natural gas and non-renewable hydrogen for both motor and heating use would gradually reach the rate of fossil fuels ·Kerosene tax for the aviation sector will be gradually increased in a linear way to the corresponding minimum tax rates applicable to motor fuels used for road transport . ·A zero rate for advanced biofuels and e-fuels used in aviation will be applied for a limited period. This contributes to the uptake these types of fuels until their production is scaled up. ·The minimum rates for heating fuels for household use will be gradually increased during this period, as described in option 1. Furthermore, proposing to introduce immediately the three categories with high rates for some traditional energy products could have negative impacts. This transitional period, among others, allows the development of electrification and advanced fuels, which are still in a pre-commercial phase. Figure 8: Simplified representation of changes in ETD indexed minima 2023-2030

Source: European Commission Two thirds of the respondents to the public consultation from businesses and from public authorities as well as 45% of the respondents from civil society consider relevant an energy tax based on energy content. Moreover, more than 90% of all types of respondents consider that the ETD revision should introduce incentives for alternative energy sources (e.g. sustainable biofuels, clean hydrogen) and reduce the possibility of favouring fossil fuels via tax reductions, exemptions and rebates A vast majority of citizens and civil society respondents but only a small minority of businesses and public authorities indicated that no exceptions should be granted to agriculture, forestry and fishery. Overall, the public consultation revealed some support to equalising the taxes for different transport modes so that they can compete on a level playing field. About one third of businesses and more than half of the other stakeholders support the taxation of the intra-EU flights and of the maritime sector based on standard energy tax rules for motor fuels. While a vast majority of all types of respondents to the public consultation would prefer a legal obligation to use Shore Side Electricity when available, a differentiated tax treatment for SSE is supported by 40% of businesses. Almost all citizens, more than 70% of civil society and public authorities and half of the businesses support the removal of the differentiation between commercial and non-commercial use of gas oil in road transport. Two thirds of citizens and half of civil society respondents to the public consultation consider the Industry sector should not be exempted; however only a bit more than 10% of public authorities and of businesses agree with the removal of this exemption. About half of the citizens and civil society respondents to the public consultation support the removal of tax exemption or reduction to Combined Heat Power but more than 85% of businesses and public authorities respondents disagree. Option 2b: Energy content option with a shorter transitional period of 7 years This option includes the same elements of option 2a but with a reduced transitional period until 2030. This impact assessment assumes a period of 7 years (2023-2030). With the 2030 Climate Target Plan, the Commission proposes to raise the EU's ambition on reducing greenhouse gas emissions to at least 55% below 1990 levels by 2030. Taxation should also contribute to this objective. Reducing the transitional period to 2030 would ensure that the review of the ETD can deliver its objectives at the same time as the rest of the other initiatives of the “Fit for 55 Package”. Accordingly, the option analyses a shorter transition period and the potential increased benefits by 2030, while taking into account the social and economic effects on users and consumers. Option 2c: Energy content Option and pollution component

The option is based on option 2a with an additional explicit tax rate for air pollution. The calculation of this additional component is based on a low-end value of the external cost of air pollution due to the consumption of energy products. (See Annex 6 for further details). This value would be incorporated in the minimum tax rates as set out in option 2a. While this pollution component would not be indexed, it would be revised at least every 5 years in order to take into account the evolution of technology in combustion and filtering systems as well as the evolution of air pollutant emissions in the EU. It should be noted that the highest increase in the minima would correspond to coal and coke and to biomass (without differentiating between sustainable or non-sustainable) mainly used as fuels for stationary motors and/or heating in absolute and relative terms. Table 4: Proposed ETD minima including the pollution component in EUR/GJ Rate energy component option 2a at the start of transitional period (2023) – not indexed Rate Air Pollution component Full rate option 2c at the start of transitional period (2023) – not indexed Motor fuels Petrol 10,75 0,23 10,98 Gasoil 10,75 0,55 11,30 Kerosene (aviation, by the end of the transitional period) 10,75 0,05 10,80 LPG 7,17 0,19 7,36 Bioethanol E100 5,38 0,35 5,73 Biodiesel B100 5,38 0,83 6,21 Heating fuels plus fuels for agriculture, stationary motors, maritime and inland shipping (including fishery) Gasoil 0,90 0,37 1,27 Heavy fuel oil 0,90 0,37 1,27 Coal and coke 0,90 7,41 8,31 Kerosene 0,90 0,37 1,27 LPG 0,60 0,37 0,97 Natural gas 0,60 0,32 0,92 Non-sustainable biofuels and bioliquids 0,90 (*) 0,90 + (*) Non-sustainable solid biomass fuels (wood and pellets) 0,90 7,40 8,30 Sustainable biofuels and bioliquids 0,45 (*) 0,45 + (*) Sustainable biomass fuels (wood and pellets), including consumers with an inputunder 20 MW48 0,45 7,40 7,85 (*) same as the equivalent fossil fuel; e.g. the rate of the air pollution component for biodiesel is 0,37 €/GJ

Source: European Commission Option 3: “Carbon content” Option (3a, 3b and 3c) This option introduces taxation based on carbon content of energy products, to the sectors which are currently not covered by the ETS (basically the transport and building sectors), in addition to the rates based on the energy content presented in option 2a and 2b. However, it should be recalled that the EGD has announced that the Commission will consider the possibility of extending the ETS to emissions from road transport, the maritime sector and buildings. The introduction of this carbon content component in the ETD would be a form of explicit carbon pricing directly linked to the level of carbon emissions. This option provides an additional relative advantage to clean products, such as renewable hydrogen, advanced biofuels and electricity, as they have low or zero carbon content. The introduction of a carbon content also differentiates among various fossil fuels, such as less CO2 intensive natural gas and more CO2 intensive coal. Since the EU harmonised carbon price is the ETS, the value for the carbon content should be linked to its price. This value would also have to be adjusted regularly to ensure it remains relevant and pegged to the evolution of the ETS over time. The value of the carbon content component from the introduction of the reviewed rules in the ETD should reflect the level of the price of ETS at that moment. For the purposes of this impact assessment, the carbon content rates have been applied as follows: 30 EUR per tonne of CO2 in 2020, 35 EUR in 2025, 40 EUR in 2030 and 45 EUR in 2035. These values approximate the present and expected future market price of the EU ETS similar to the other impact assessment of the “Fit for 55 Package”. These values take into account the fact that the effective cost in the EU ETS is lower if free allocation of allowances to many ETS sectors are also considered. These values will operate as a minimum rate to be added to the energy content component. In option 3a a transitional period of 10 years is applied to the taxation of intra-EU aviation, as well as to heating fuels, whereas in option 3b a transitional period of seven years is considered. Finally, option 3c introduces a pollution component in an analogous way to option 2c. As option 2a and 2b, options 3a and 3b will also bring positive effects on air pollution emissions following the increase in taxation of the more air pollutant products with the additional introduction of the carbon content element. Table 5: Tax rates with carbon content Energy component rate (EUR/GJ) Not indexed CO2 tax rate (EUR/tCO2) in 2030 Fuel emission factor (tCO2/GJ) Carbon component (EUR/GJ) Total minimum rate (energy + carbon component) (EUR/GJ) Not indexed Total minimum rate at start of end of transition period (energy + carbon component) (2033 EUR/GJ) Motor fuels Petrol 10,75 40 0,07 2,80 13,55 16,05 Gasoil 10,75 40 0,07 2,80 13,55 16,05 Kerosene (aviation) 0 40 0,07 2,80 2,80 2,80 LPG 7,17 40 0,06 2,40 9,57 11,24 Natural