Proposal for a COUNCIL DECISION authorising Italy to apply a differentiated rate of excise duty to fuels containing biodiesel in accordance with Article 8(4) of Directive 92/81/EEC

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Submission of request

By letter of 23 April 2001, the Italian authorities applied to the Commission for a derogation allowing them to apply an exemption from excise duty on biodiesel and other biofuels in accordance with Article 8(4) of Directive 92/81/EEC. [1]

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

In order to obtain the information it required to evaluate the request, the Commission sent additional questions by letters dated 16 May and 8 August 2001, to which the Italian authorities replied on 17 July and 28 September 2001 respectively. A meeting was held between Commission representatives (DGs COMP and TAXUD) and the Italian authorities on 15 October. A letter from the Italian authorities on 22 October 2001 enabled the Commission to finalise its evaluation of the application for a derogation.

1.1. Background

As part of a pilot project covering the period 1 July 1998 to 30 June 2001, Italy conducted a trial on the conditions for the use of biodiesel. Exemption from excise duty was granted for a maximum of 125 000 tonnes of biodiesel per year. The implementing conditions were laid down by decree. [2] The State aids which formed part of the scheme were the subject of a Commission decision not to raise any objections. [3]

[2] Interministerial decree No 219 of 22 May 1998, subject beforehand to the information procedure provided for in Council Directive 83/189/EEC of 28 July 1983, as amended.

[3] Case N 457/97, decision SG (98) D/235, 13 January 1998.

The biodiesel quota eligible for the excise duty exemption was allocated to: nine participating firms (including seven Italian) during the first year, in respect of 45 597 tonnes of biodiesel released for home use; eight (including six Italian) in the second year in respect of 69 880 tonnes released for home use; and ten (including seven Italian) in the third year in respect of the release for home use of the total quota.

Italy concluded from the pilot project that a potential demand exists for biodiesel:

- as a diesel additive, used in quantities of less than 5%;

- as a motor fuel mixed with diesel, in a proportion of approximately 25%, mainly for use by urban service vehicle fleets;

- as a heating fuel, used in 100% pure form as a replacement for diesel.

Further pilot initiatives might also be undertaken concerning the use of pure biodiesel as a motor fuel.

1.2. Application for a tax exemption on biodiesel

Italy is therefore requesting an exemption from excise duty on biodiesel for a three-year programme starting on 1 July 2001. This measure is in keeping with a specific policy geared to compliance with commitments entered into in the Kyoto protocol by promoting the use of biodiesel in automobiles.

Article 21 of Law No 388 of 23 December 2000 states that the product known as 'biodiesel', obtained by the distillation of vegetable oils and their derivatives, is used as a motor or heating fuel, as an additive or as an extender in motor and heating fuels. Biodiesel is manufactured or mixed with diesel or other mineral oils under the tax warehousing arrangements. An annual quota of 300 000 tonnes of biodiesel will be eligible for exemption from excise duty. The current rate of excise duty on diesel motor fuel is ITL 739 064 (EUR381.7) per 1 000 litres.

In its letter of 22 October 2001, Italy specifies that, at this stage, it is merely submitting an application under the procedure laid down in Article 8(4) of Directive 92/81/EEC for biodiesel used as: (i) an additive to diesel in percentages of less than 5% and (ii) a motor fuel mixed with diesel in a proportion of approximately 25%, mainly for the use of urban service vehicle fleets. The Italian authorities are continuing to investigate the conditions for an exemption from excise duty on pure biodiesel used as a motor fuel. They will provide the Commission with further information at a later date.

The Italian authorities further indicate that a comparison of the respective costs (including those of the raw materials) of manufacturing biodiesel and fossil diesel shows that the proposed excise exemption, which is of limited duration and applicable to a given quantity of the product, does not result in any overcompensation. Moreover, the reduction in excise duty will be recalculated each year to ensure that the amount does not exceed the extra cost of manufacturing biodiesel compared with equivalent products of fossil origin. In the event of overcompensation, the Italian authorities would adjust the amount of the excise duty reduction when introducing the annual draft Finance Law.

Lastly, pure biodiesel used as a heating oil is not subject to excise duty under Directive 92/81/EEC as it is not a hydrocarbon.

1.3. Application concerning other biofuels

In its communication of 23 April 2001, Italy also envisaged reductions in excise duty on (i) bioethanol and ethyl tertiary butyl ether (ETBE), derived from products of agricultural origin, and (ii) additives and new formulas produced from biomass for lead-free petrol and diesel (excluding biodiesel). These reductions were part of a pilot project, i.e. in accordance with Article 8(2)(d) of Directive 92/81/EEC, designed to increase the use of more environmentally friendly energy sources.

By letter of 22 October 2001, the Italian authorities announced the suspension of these measures pending finalisation of (i) the ongoing studies into the environmental impact of these products and (ii) the appropriate regulatory framework.

2. Evaluation by the Commission

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

The Italian authorities have applied to the Commission for derogations allowing them to apply excise duty reductions on biodiesel and other biofuels in accordance with Article 8(4) of Directive 92/81/EEC. [4] Italy's letter of 22 October 2001 states that, at the present stage, the applications relate only to biodiesel used as an additive to diesel in quantities of less than 5% and as a motor fuel mixed with diesel in a proportion of approximately 25%, mainly for the use of urban service vehicle fleets.

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

As required by Directive 92/81/CEE, the other Member States have been informed of Italy's request.

Exemptions requested under Article 8(4) of Directive 92/81/EEC must be examined in terms of their compliance with Community policies.

(1) The development of renewable energies and biofuels in particular has been encouraged since 1985. Council Directive 85/536/EEC of 5 December 1985 on crude oil savings through the use of substitute fuel components [5] stresses the role of biofuels in reducing Member States' dependence on oil imports and authorises the incorporation into petrol of up to 5% of ethanol by volume and up to 15% of ETBE by volume. Under Council Decisions 93/500/EEC [6] and 98/352/EC [7] and Decision 646/2000/EC of the European Parliament and of the Council, [8] the ALTENER programme on promoting renewable energies in the Community was adopted with the aim of securing a market share for biofuels of 5% of total motor vehicle fuel consumption by 2005. The 1997 White Paper on renewable sources of energy [9] further recommended setting an objective of the production of 18 million tonnes of liquid biofuels by 2010 as part of an overall goal of doubling the share of renewables in EU energy consumption by the same year. The Commission's Green Paper 'Towards a European strategy for energy supply security' [10] stresses the key role of tax instruments in achieving these aims by reducing the difference in cost price between biofuels and competing products. Lastly, on 7 November 2001, [11] the Commission adopted an action plan and two proposals for directives on encouraging the use of substitute fuels in the transport sector, starting with regulatory and tax measures designed to promote biofuels.

[5] Council Directive 85/536/EEC of 5 December 1985, OJ L 334, 12.12.1985, p.20, as last amended by Directive 87/441/EC of 29 July 1987, OJ L 238, 21.8.1987, p. 40.

[6] OJ L 235, 18.9.1993, p. 41.

[7] OJ L 159, 3.6.1998, p. 53.

[8] OJ L 79, 25.10.2000, p. 1.

[9] COM(1997) 599 final, 26.11.1997.

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

[11] COM(2001) 547 final, 7.11.2001.

The exemption requested by the Italian authorities is therefore in line with the Community's policy of promoting the biofuel sector in the interests of protecting the environment and ensuring security of energy supply.

(2) The Commission notes that the tax reductions proposed by Italy are proportional to the percentage of biofuel contained in the final product and that the effective excise rates are higher than the minimum Community rates applicable:

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(3) The Italian authorities have undertaken to recalculate the reduction in excise duty each year to ensure that it does not exceed the extra cost of manufacturing biodiesel compared with equivalent products of fossil origin.

(4) The measure is of limited duration. The reductions in excise duty are intended to form part of a three-year programme.

(5) As regards the State aid rules, a decision on the compatibility of the proposal will be adopted by the Commission as soon as the Council has authorised Italy's application.

3. Decision

The Commission proposes that, under Article 8(4) of Council Directive 92/81/EEC, the Council authorise Italy to apply differentiated rates of excise duties until 30 June 2004 to mixtures used as motor fuels containing 5% or 25% of biodiesel.

The reduction in excise duty applied by the Italian authorities may not be greater than the amount of excise duty payable on the volume of biofuels present in the products eligible for the reduction.

The reduction in excise duty must be adjusted to take account of changes in the price of raw materials to avoid over-compensating for the extra costs involved in the manufacture of biofuels.

The rates of excise duty applicable to the mixtures referred to above must comply with the terms of Council Directive 92/82/EEC of 19 October 1992 on the approximation of the rates of excise duties on mineral oils, [12] and in particular the minimum rates laid down in Article 5 thereof.

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

Proposal for a COUNCIL DECISION authorising Italy to apply a differentiated rate of excise duty to fuels containing biodiesel in accordance with Article 8(4) of Directive 92/81/EEC

(only the Italian text is authentic)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Directive 92/81/EEC of 19 October 1992 on the harmonisation of the structures of excise duties on mineral oils, [13] and in particular Article 8(4) thereof,

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

Having regard to the proposal from the Commission,

Whereas:

(1) As part of a pilot project covering the period 1 July 1998 to 30 June 2001, Italy conducted a trial on the conditions for the use of biodiesel. Exemption from excise duty was granted for a maximum of 125 000 tonnes of biodiesel per year. By letter of 23 April 2001, the Italian authorities applied to the Commission for a derogation allowing them to apply an exemption from excise duty on biodiesel and other biofuels in accordance with Article 8(4) of Directive 92/81/EEC, for a period of three years from 1 July 2001 to 30 June 2004. In order to obtain the information it required to evaluate the request, the Commission sent additional questions by letters dated 16 May and 8 August 2001, to which the Italian authorities replied on 17 July and 28 September respectively. A meeting was held between Commission representatives and the Italian authorities on 15 October 2001. A letter from the Italian authorities on 22 October 2001 enabled the Commission to finalise its evaluation of the application for a derogation. Pending approval by the Council of the requested exemption, Italy has suspended the tax reduction scheme.

(2) Italy has applied for a differentiated rate of excise duty to be authorised on biodiesel used as an additive to diesel in quantities of less than 5% and as a motor fuel mixed with diesel in a proportion of approximately 25%, mainly for the use of urban service vehicle fleets. In the latter case, in view of the high percentage contained in the mixture, checks should be carried out on the adjustment of engines to the fuel to avoid excessive emission of pollutants.

(3) The other Member States have been notified of this request.

(4) The development of renewable energies and biofuels in particular has been encouraged since 1985. Council Directive 85/536/EEC of 5 December 1985 on crude oil savings through the use of substitute fuel components [14] stresses the role of biofuels in reducing Member States' dependence on oil imports and authorises the incorporation into petrol of up to 5% of ethanol by volume and up to 15% of ETBE by volume. Under Council Decisions 93/500/EEC [15] and 98/352/EC [16] and Decision 646/2000/EC of the European Parliament and of the Council, [17] the ALTENER programme on promoting renewable energies in the Community was adopted with the aim of securing a market share for biofuels of 5% of total motor vehicle fuel consumption by 2005. The 1997 White Paper on renewable sources of energy [18] further recommended setting an objective of the production of 18 million tonnes of liquid biofuels by 2010 as part of an overall goal of doubling the share of renewables in EU energy consumption by the same year. The Commission's Green Paper 'Towards a European strategy for energy supply security' [19] stresses the key role of tax instruments in achieving these aims by reducing the difference in cost price between biofuels and competing products. Lastly, on 7 November 2001 [20], the Commission adopted an action plan and two proposals for directives on encouraging the use of substitute fuels in the transport sector, starting with regulatory and tax measures designed to promote biofuels.

[14] Council Directive 85/536/EEC of 5 December 1985, OJ L 334, 12.12.1985, p.20, as last amended by Directive 87/441/EC of 29 July 1987, OJ L 238, 21.8.1987, p. 40.

[15] OJ L 235, 18.9.1993, p. 41.

[16] OJ L 159, 3.6.1998, p. 53.

[17] OJ L 79, 25.10.2000, p. 1.

[18] COM(1997) 599 final, 26.11.1997.

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

[20] COM(2001) 547 final, 7.11.2001

(5) The derogations requested by the Italian authorities are therefore in line with the Community's policy of developing the biofuel sector, in the interests of protecting the environment and ensuring security of energy supply.

(6) The reductions in excise duty proposed by Italy are proportional to the percentage of biofuel contained in the final product. Moreover, the effective rates of excise duty are higher than the applicable Community minimum rates, in accordance with Council Directive 92/82/EEC of 19 October 1992 on the approximation of the rates of excise duties on mineral oils: [21]

[21] Directive published in OJ L 316, 31.10.1992, p. 19, as last amended by Directive 94/74/EC.

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(7) The Italian programme is of a limited duration of three years. An annual quota of 300 000 tonnes of biodiesel will be eligible for the differentiated rate of excise duty.

(8) The Commission regularly reviews reductions and exemptions to check that they do not distort competition or hinder the operation of the internal market and are not incompatible with Community policy on protection of the environment, energy and transport,

HAS ADOPTED THIS DECISION:

Article 1

1. Italy is authorised to apply differentiated rates of excise duty on mixtures used as motor fuels containing 5% or 25% of biodiesel until 30 June 2004.

2. The reduction in excise duty may not be greater than the amount of excise duty payable on the volume of biofuels present in the products eligible for the reduction.

3. The rates of duty applicable to the mixtures referred to in (1) must comply with the terms of Council Directive 92/82/EEC, and in particular the minimum rate laid down in Article 5 thereof.

Article 2

The reduction in excise duty shall be adjusted to take account of changes in the price of raw materials to avoid over-compensating for the extra costs involved in the manufacture of biofuels.

Article 3

This Decision shall expire on 30 June 2004.

Article 4

This Decision is addressed to Italy.

Done at Brussels,

For the Council

The President