Communication from the Commission to the Council in accordance with Article 19(1) of Council Directive 2003/96/EC (taxation of industrial uses of LPG and taxation of coal)
Date: 2006-12-05
Institutions: European Commission
Subjects: Greece, Lithuania, coal, derogation from EU law, environmental tax, fuel tax, tax exemption, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 5.12.2006 
COM(2006) 768 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

in accordance with Article 19(1) of Council Directive 2003/96/EC (taxation of industrial 
uses of LPG and taxation of coal) 

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1. 

INTRODUCTION  

In  accordance  with  Article  19(1)  of  Council  Directive  2003/96/EC1  restructuring  the 
Community framework for taxation of energy products and electricity (hereafter referred to as 
the “Energy Tax Directive” or the "Directive"), in addition to the provisions foreseen in the 
Directive,  in  particular  in  its  Articles  5,  15  and  17,  the  Council  acting  unanimously  on  a 
proposal  from  the  Commission,  may  authorise  any  Member  State  (that  requested  so)  to 
introduce further tax exemptions or tax reductions for specific policy considerations. 

The Commission  shall examine the request. Afterwards, it shall either present a proposal to 
the Council or, alternatively, shall inform the Council of the reasons why it has not proposed 
the authorisation of such a measure. 

Within a broader framework of review of derogations expiring in the Energy Tax Directive by 
the end of 2006 Greece and Lithuania submitted a request for authorisation to derogate from 
some of the provision of the Energy Tax Directive for certain energy products. These letters 
were registered with the Directorate General for Taxation and Customs Union2. 

The  purpose  of  this  communication  is  to  inform  the  Council  of  the  reasons  why  the 
Commission does not propose the authorisations requested. 

2. 

SUMMARY OF THE REQUESTS 

2.1. 

The Greek request 

Greece  would  like  to  apply  a  reduced  rate  of  taxation  to  LPG  used  for  industrial  purposes 
equal to EUR 0.29 per 1000 kg of LPG. The applicable minimum levels of taxation (pursuant 
to Article 8 of the Energy Tax Directive) are EUR 41 per 1000 kg of LPG used as motor fuel. 

According to the Greek authorities, the measure has two main objectives. Firstly, to promote 
the use of more environmental friendly fuel compared to other mineral oils, as a second-best 
and  temporary  solution  taking  into  account  that  the  natural  gas  network  has  not  been 
completed  yet  in  Greece.  In  this  connection  the  Greek  authorities  stress  the  environmental 
benefits of LPG. The second objective of the measure is to reinforce the competitive position 
of domestic industries. 

The request does not foresee a date of termination. 

2.2. 

The Lithuanian request 

Lithuania would like to derogate from the general provisions of the Energy Tax Directive, in 
particular its Article 2(1) and not to subject coal to taxation. In other words Lithuania would 
like to postpone the introduction of taxation of coal. 

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Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for taxation 
of energy products and electricity (OJ L 283 of 31.10.2003 p. 51; Directive last amended by Directives 
2004/74/EC and 2004/75/EC (OJ L 157 of 30 April 2004, p. 87 and p.100). 
On 13 October 2006 (Greece) and on 29 September 2006 (Lithuania). 

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According  to  the  Lithuanian  authorities  the  main  objective  of  the  measure  is  to  reconstruct 
and  to  modernise  businesses  in  remote  areas  of  the  country,  especially  those  using  coal  in 
their activity. According to the Lithuanian authorities achieving such objective requires a lot 
of  time  and  therefore  there  is  a  need  to  postpone  introduction  of  taxation  of  coal.  The 
Lithuanian authorities in this relation underline that the objective of the measure is to promote 
economic development of remote areas of the country. Furthermore the Lithuanian authorities 
have  stressed  the  increasing  need  for  low-cost  energy  sources  in  an  environment  with 
increasing energy prices for oil and gas and they also point to the changes that the national 
energy system is currently undergoing due to the closure of the Ignalina nuclear power plant. 

The request foresees a date of termination by 31 December 2009. 

3. 

BACKGROUND TO THE REQUESTS 

Taxation  of  mineral  oils,  including  LPG  has  been  harmonised  in  the  EU  since  19933. 
Community  legislation  sets  minimum  levels  of  taxation  for  its  motor  fuel  and  heating  fuel 
uses. Reflecting concerns of competitiveness of certain commercial and industrial branches in 
the  EU  vis-à-vis  third  countries,  Article  8  of  the  Energy  Tax  Directives  establishes 
significantly lower minimum levels of taxation for the use as motor fuel for the corresponding 
purposes. Within the internal market, these minimum levels aim at establishing a level playing 
field between businesses. 

In  this  context  Greece  was  initially  authorised  to  apply  reduced  rates  of  taxation  and 
exemption from taxation to LPG used for industrial purposes. In 2001 this authorisation was 
for the last time extended by the Council until 31 December 2006 and was later incorporated 
into the transitional arrangements of the Energy Tax Directive. 

Through the adoption of the Energy Tax Directive, the scope of harmonised excise duties was 
extended  to  energy  products  other  than  mineral  oils,  but  directly  competing  with  the  latter, 
such as coal. The purpose was to remove distortions of competition between mineral oils and 
other directly competing energy products not subject to EU-wide taxation and, in addition, to 
remove  distortions  of  competition  between  energy  consumers  in  different  Member  States 
taxing  or  not  taxing  energy  products  other  then  mineral  oils  (cf.  the  second  recital  of  the 
Energy Tax Directive). 

In  order  to  allow  Member  States  to  adapt  to  the  new  situation  and  in  particular  in  order  to 
avoid  sudden  price  increases  for  newly  taxable  products,  several  transitional  periods  (either 
general  or  country-specific)  were  granted  in  the  Energy  Tax  Directive.  In  this  context,  and 
given  Lithuania's  own  particular  position,  this  Member  State  was  authorized  to  postpone 
taxation of coal, coke and lignite until 1 January 2007.4  

In  its  June  2006  Communication  Review  of  derogations  in  Annexes  II  and  III  of  Council 
Directive  2003/96/EC  that  expire  by  the  end  of  2006  (hereafter  referred  to  as  "the  2006 

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Council  Directive  92/81/EEC  of  19  October  1992  on  the  harmonization  of  the  structures  of  excise 
duties  on  mineral  oils  (OJ  L  316  of  31.10.1992);  Directive  repealed  together  with  Council  Directive 
92/82/EEC  of  19  October  1992  on  the  approximation  of  the  rates  of  excise  duties  on  mineral  oils  as 
from 31 December 2003 by means of Council Directive 2003/96/EC. 
Cf. Council Directive 2004/74/EC of 29.4.2004, OJ L 157, p. 87 

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Communication")5  the  Commission  provided  an  overview  of  the  wide-ranging  flexibility 
already  contained  in  the  Energy  tax  Directive  and,  in  particular,  highlighted  the  logic  and 
motivation underpinning the inclusion of several product-specific or user-specific options. In 
particular, the Commission stressed that the Directive already takes due account of potential 
competitiveness  constraints  that  might  arise in  relation  to  energy  taxation.  The  Commission 
also highlighted in this communication the crucial importance attributed in the directive to the 
taxation of coal. 

4. 

EVALUATION BY THE COMMISSION 

The Commission considers that Greece and Lithuania have in their requests mostly advanced 
arguments  that  are  taken  into  account  in  the  Directive  itself.  This  refers  in  particular  to  the 
scope of  taxation, setting of the  minimum  levels  of  taxation  and possible tax differentiation 
for certain products and uses. In providing for the various criteria, the Community legislator, 
acting  in  accordance  with  the  procedure  set  out  in  Article  93  EC,  weighed  analogous 
arguments  against  the  objectives  and  interests  referred  to,  equally,  in  Article  19(1),  third 
indent  of  the  Energy  Tax  Directive,  in  particular  the  interest  of  the  internal  market  and 
undistorted competition, the Community environment and energy policies. 

Notably,  the  Community  legislator  took  duly  into  account  competitiveness  aspects  while 
adopting the Directive. These influenced first of all the setting of minimum levels of taxation 
according  to  product  and  use.  Furthermore,  the  Directive  contains  an  entire  set  of  possible 
options,  available  to  Member  States  on  the  basis  of  the  Directive  alone,  allowing  for 
additional  differentiations  in  tax  rates  for  different  reasons,  including  competitiveness 
concerns  in  some  cases.  In  most  of  the  cases,  the  minimum  levels  of  taxation  must  be 
respected,  in  order  to  ensure  a  level  playing  field  between  undertakings  on  the  internal 
market. Levels below these minima may be applied, as far as business users are concerned, in 
accordance with the strict conditions set out in Article 17(2) to (4) of the  Directive. One of 
these conditions is that the environmental effect of these minima be maintained through other 
means. 

The minimum levels applicable within the scope of Article 8 of the Directive, lower than the 
levels fixed in Article 7 (1), have to be seen in this context. Therefore, the reference made by 
Greece  to  the  competitive  position  of  its  industries  does  not  reflect  a  specific  policy 
consideration  for  the  purposes  of  Article  19  of  the  Directive.  An  unlimited  derogation  for 
reasons of competitivity, as requested by Greece, can therefore not be accepted.  

Nor is it appropriate, in this context, to grant a further derogation for a limited period. Greece 
has already had enough time to adapt to the minimum levels of taxation for LPG given that 
harmonised minimum levels of taxation for motor fuel for certain industrial and commercial 
purposes have existed since 1993 and apply to all Member States. Greece has not raised any 
argument in this context liable to be taken into account under Article 19 of the Energy Tax 
Directive. 

As far as Greece invokes the environmental aspects  of  LPG, the Commission would like to 
point  out  that  to  its  knowledge  deployment  of  natural  gas  network  has  indeed  been  already 
partially  completed,  in  particular  in  the  most  industrialised  areas  of  Greece.  Too  favourable 

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COM(2006) 342  of  30  June  2006  Review  of  derogations  in  Annexes  II  and  III  of  Council  Directive 
2003/96/EC that expire by the end of 2006. 

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tax  treatment  of  LPG,  in  particular  the  virtual  exemption  foreseen  by  this  Member  State, 
could discourage the users from switching to natural gas, which is at least as environmentally 
friendly as LPG. This would upset the competitive relationship between these two fuels fixed 
by  the  Council  in  the  context  of  Article  8  of  the  Energy  Tax  Directive.  This  competitive 
relationship,  together  with  other  similar  relationships,  was  deliberately  set  by  the  Council, 
acting in accordance with the procedure set out in Article 93 EC. A Member State's different 
evaluation does not constitute a specific policy consideration within the meaning of Article 19 
of the Energy Tax Directive.  

With regard to the request made by Lithuania, it has to be recalled first and foremost that the 
Energy Tax Directive has deliberately extended harmonised excise duties to coal (cf. above). 
In addition to the aspect of competition between different fuels, this is justified by the need 
for  environmental  protection,  an  aspect  the  Energy  Tax  Directive  takes  into  account  in 
accordance  with  the  nature  of  each  energy  product.  In  this  regard,  the  Directive  explicitly 
refers  to  Article  6  of  the  Treaty  which  requires  that  environmental  protection  should  be 
integrated  into  the  definition  and  implementation  of  other  Community  polices  (6th  recital). 
Furthermore,  it  refers  to  the  Kyoto  Protocol  ratified  by  the  Community6  and  recalls  that 
taxation  of  energy  products  and  electricity  is  one  of  the  instruments  available  to  assist  in 
achieving  the  objectives  of  the  Protocol  (7th  recital).  Yet,  among  the  main  fuel  categories 
covered by the Energy Tax Directive, coal has the highest CO2 emissions.  

Against  this  background,  Lithuania's  request  cannot  be  accepted  to  the  extend  it  has  to  be 
understood  as  being  based  on  concerns  of  competitiveness  in  general.  The  Energy  Tax 
Directive  deliberately  integrates  coal  into  its  regime,  precisely  for  reasons  of  competition, 
while providing for different variations, as detailed above. Thus, concerns of the said nature 
cannot  be  qualified  as  specific  policy  considerations  for  the  purposes  of  Article  19  of  the 
Energy Tax Directive. 

It equally follows from the above that, from an environmental point of view, which has also to 
be taken into account under Article 19, more favourable tax treatment of coal would not be 
justified either. 

The  above  conclusions  are  even  strengthened  by  Lithuania's  argument  whereby  coal  suffers 
less  from  the  energy  price  increase  than  other  more  environmental  friendly  fuels  such  as 
natural gas. 

Furthermore, it is appropriate to address some additional arguments presented by Lithuania. 

Lithuania's  request  can  also  be  understood  as  being  motivated  by  the  desire  to  prolong  the 
exemption of coal as a measure of transitional nature. 

In  this  regard,  it  must  be  stressed  that  Lithuania  was  granted  a  derogation  allowing  it  to 
exempt coal, coke and lignite from taxation until 1 January 20077 fully in line with its request 
submitted before EU accession in the framework of the granting of transitional periods from 

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Council  Decision  94/69/EC  of  15  December  1993  concerning  the  conclusion  of  the  United  Nations 
Framework Convention on Climate Change, OJ L 33, 7.2.1994, p. 11. 
Council  Directive  2004/74/EC  amending  Directive  2003/96/EC  as  regards  the  possibility  for  certain 
Member  States  to  apply,  in  respect  of  energy  products  and  electricity,  temporary  exemptions  or 
reductions in the levels of taxation (OJ L 157 of 30 April 2004, p. 87). 

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the newly adopted directive to the acceding Member States8. The purpose of the transitional 
periods  was  to  allow  the  Member  States  concerned  to  cope  with  the  new  requirements 
introduced by the Directive. In this regard, the Council has found that the minimum rates set 
by  Directive  2003/96/EC  are  liable  to  create  serious  economic  and  social  difficulties  and 
therefore transitional periods are needed (cf. 2nd and 3rd of Directive 2004/74/EC). 

The transitional  periods  granted under Directive 2004/74/EC in  accordance  with Lithuania's 
request took into account, in particular, the aspect relied upon by Lithuania today. It concerns 
the  transition  necessary  for  the  Lithuanian  energy  sector  following  the  decommissioning  of 
the  Ignalina  nuclear  power  plant.  In  this  respect,  Lithuania  requested  and  was  awarded  a 
derogation  whereby  it  may  exempt  natural  gas  and  electricity  until  from  taxation  1  January 
2010, in accordance with the decommissioning programme of the Ignalina power plant. 

Given  that  all  these  aspects  have  duly  been  taken  through  the  adoption  of  Directive 
2004/74/EC, the Commission cannot identify any specific policy consideration in the present 
context. 

Finally,  the  Commission  cannot  accept  the  regional  policy  argument  put  forward  by 
Lithuania. 

In this respect, the Commission notes that the derogation granted for the period 2004 – 2006 
was never intended to serve the objective of reconstruction and modernisation of businesses in 
remote areas of the country, so that no "prolongation" of the derogation is possible under this 
heading.  

The said objective cannot be accepted, in itself, as a valid policy consideration either, liable to 
justify the authorisation requested under Article 19 of the Energy Tax Directive. Quite apart 
from the fact that the favourable tax treatment envisaged is not even limited to certain regions, 
tax  exemption  for  coal  does  not  appear  to  be  a  proportionate  response  to  such  a  policy 
objective. Unlike appropriate direct support to specific activities9, the tax exemption for coal 
would not be targeted to corresponding needs of the various situations, but cover consumption 
of  coal  indifferently,  while  undermining  without  necessity  one  of  the  main  objects  of  this 
taxation,  namely  to  create  incentives  towards  improved  energy  efficiency  and  resulting 
protection of the environment. Moreover, the Commission would recall again that the Energy 
Tax  Directive  contains  provisions  which  allow  certain  concessions  with  regard  to  taxation, 
while  preserving  the  environmental  effects  it  is  supposed  to  yield  (cf.  in  particular  Article 
17(2) to (4) of the Directive). 

5. 

CONCLUSIONS 

On  the  basis  of  the  above  considerations,  the  Commission  is  of  the  opinion  that  the  policy 
considerations  presented  do  not  justify  the  authorisations  requested,  which  would  lead  to 
derogations from some of the key provisions of the Energy Tax Directive. Given the terms of 
the  Energy  Tax  Directive,  including  the  various  options  it  provides  for,  the  competitive 
concerns underpinning the requests are not in the nature of specific policy considerations for 

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COM(2004) 42 of 28 January 2004 Proposal for Council Directive amending Directive 2003/96/EC as 
regards the possibility for certain Member States to apply, in respect of energy products and electricity, 
temporary exemptions or reduction in the level of taxation. 
The grant of which is of course subject to rules applicable in the field of State aids.  

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the purposes of Article 19. Some aspects of the requests submitted contradict the objectives 
and interests underlying the provisions of the Directive, equally mentioned in its Article 19. 
Exemption  of  coal  is  not  a  proportionate  response  to  the  reconstruction  and  modernisation 
objectives put forward by Lithuania. 

Nor are the any reasons which, under Article 19, would justify the authorisations requested as 
transitional measures. 

The Commission therefore does not propose the authorisations requested. 

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