COMMISSION STAFF WORKING PAPER
Date: 2011-04-13
Institutions: European Commission
Subjects: electrical energy, energy-generating product, tax on consumption, tax system

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EUROPEAN COMMISSION 

Brussels, 13.4.2011 
SEC(2011) 410 final 

COMMISSION STAFF WORKING PAPER 

SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying document to the 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2003/96/EC restructuring the Community framework for the 
taxation of energy products and electricity 

{COM(2011) 169 final} 
{SEC(2011) 409 final} 

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1. 

PROBLEM DEFINITION 

The  Commission  services  carried  out  an  impact  assessment  to  examine  the  impacts  of 
possible  options  for  the  revision  of  the  Energy  Taxation  Directive1  (hereafter  "the  ETD"  or 
"the Directive"). 

The EU has set itself a series of demanding, legally binding climate and energy targets. The 
current  Directive  is  not  consistent  with  this  policy  framework  and  contains  several 
shortcomings from the perspective of the functioning of the internal market. In particular, the 
following problems should be addressed: 

(1) The current minimum rates are based on the volume of energy products consumed. They 
do  not  reflect  the  energy  content  or  the  CO2  emissions  of  the  energy  products,  leading  to 
inefficient energy use and distortions in the internal market. They also create incentives that 
are contradictory to the EU energy and climate change goals as, for instance, they promote the 
use  of  coal  (lower  tax  rate)  which  is  the  product  with  the  highest  CO2  content.  As  regards 
motor  fuels,  lower  minima  for  diesel  further  reinforce  the  natural  advantage  that  diesel  has 
over  petrol  due  to  its  higher  energy  content.  The  current  minimum  rates  also  discriminate 
against renewables which are in principle taxed at the rate of the conventional fuel which they 
replace  even  though  their  energy  content  is  lower  (e.g.  ethanol  versus  petrol  and  biodiesel 
versus gas oil). Moreover, the current minima do not create a level playing field for business 
consumers,  because,  in  practice,  economic  operators  can  be  better  off  compared  to  others 
depending on the energy source they use. 

(2)  There  is  lack  of  coordination  between  the  ETD  and  the  EU  ETS  (Emission  Trading 
System) Directive2. The purpose of both the EU ETS and of a CO2 tax which Member States 
can levy on the basis of the ETD is to allow for cost-efficient reductions in greenhouse gases 
for a specific set of activities. However, CO2 taxation on the basis of the ETD is applied by 
Member  States  in  an  uncoordinated  manner.  Hence,  more  guidance  and  clearer  rules  in  the 
ETD  are  required.  The  scope  of  the  ETD  covers  in  principle  all  energy  products  and 
electricity  used  to  produce  heat  or  to  move  engines.  The  EU  ETS  Directive  applies  to 
greenhouse  gas  emissions  from  major  energy  and  industrial  installations.  Some  operators 
consuming  energy  are  covered  by  both  instruments  (e.g.  paper  mills),  whilst  others  are  left 
outside  the  scope  of  both  regulatory  frameworks  (e.g.  small  installations  using  energy  in 
certain industrial processes). Both situations can lead to cost-efficiency losses and can distort 
the  internal  market.  Whilst  combined  application  of  taxation  and  the  EU  ETS  Directive 
produces a strong incentive to reduce emissions, this might not be where reducing emissions 
would  be  the  cheapest.  This  undermines  the  very  logic  of  the  EU  ETS  and  distorts  its 
functioning. 

(3)  The  ETD  contains  two  provisions  allowing  for  special  treatment  of  certain  energy 
consumers which have to be reviewed by the Council on the basis of a Commission proposal. 
Article  9(2)  of  the  ETD  allows  three  Member  States  (BE,  LU  and  DK)  to  apply  levels  of 
taxation  for  heating  gas  oil  below  the  minimum  level  of  taxation.  Article  15(3)  of  the  ETD 

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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 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a 
scheme for greenhouse gas emission allowance trading within the Community and amending Council 
Directive 96/61/EC (OJ L 275, 25.10.2003, p. 32–46). 

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allows  Member  States  to  apply  a  level  of  taxation  down  to  zero  to  energy  products  and 
electricity  used  in  agricultural,  horticultural  or  piscicultural  works,  and  in  forestry.  It  is  the 
only  provision  in  the  ETD  that  allows  that  certain  business  consumers  benefit  from 
unconditional reductions/exemptions below the EU minima. 

2. 

IS EU ACTION JUSTIFIED ON GROUNDS OF SUBSIDIARITY? 

The problems identified can only be remedied by means of a revision of the ETD. Under the 
existing ETD, Member States can increase the rates of their energy taxes or introduce CO2-
related  taxes.  However,  such  national  approaches  risk  distorting  the  internal  market,  due  to 
the non-harmonised structure and level of the national taxes:  

(1) 

(2) 

(3) 

The current minimum rates limit the level of ambition that Member States can pursue 
with  taxes  on  energy,  in  particular  for  business  use  where  energy  taxation  directly 
affects the competitiveness of companies.  

CO2 taxes introduced in the framework of the existing ETD do not adequately address 
emissions in the non-ETS sector as a large part of energy use remains untouched by 
those  CO2  taxes.  Furthermore,  for  energy  uses  covered  by  the  ETD,  it  is  difficult  to 
apply a CO2 tax only to non-ETS installations. 

A theoretical "CO2 tax" can be put into practice in a number of ways and the lack of an 
EU-framework opens the door to the creation of national solutions which can lead to 
internal market distortions and/or double taxation. 

3. 

THE MAIN POLICY OBJECTIVES 

The main objective of the revision of the ETD is to bring it more closely into line with the 
EU's energy and climate change objectives, in particular to address CO2 emissions in the non-
ETS  sector,  avoid  negative  interference  with  the  EU  ETS,  facilitate  energy  savings  and 
deployment of renewables and allow revenue generation in an un-distortive way. In general, 
the revision should improve the structure of the current Directive, so as to enable the Member 
States  to  use  energy  taxation  more  effectively  for  environmental  and  other  policy  purposes 
and to improve the functioning of the internal market. 

The objectives of the revision of the ETD can be further specified as follows: 

(1) 

(2) 

(3) 

Ensure consistent treatment of energy sources in the ETD and therefore create a real 
level playing field between different energy consumers. 

Provide an adapted taxation framework for renewable energies. 

Provide a framework for the use of CO2 taxation in areas where the EU ETS does not 
apply  and  avoid  overlaps  between  both  instruments  leading  to  losses  in  cost-
efficiency.  

4. 

POLICY OPTIONS 

In order to examine how the different policy objectives could best be addressed, a number of 
options were examined, comparing them to the baseline (= no further changes to the existing 

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ETD beyond the gradual expiry of the remaining transitional periods). Option 1 and 2 consist 
in revising the minimum rates of the various energy sources in a coherent way, respectively 
based  on  an  energy-content  and  on  a  CO2  basis.  Options  3A  and  3B  propose  to  revise  the 
structure of the Directive by splitting existing minima into two parts (energy content and CO2 
emissions)  reflecting  the  different  environmental  objectives  behind  energy  taxes  -  energy 
savings on the one hand and reduction of CO2 emissions on the other (option 3B having lower 
minimum rates for CO2 taxation). Option 4 consists in introducing an additional uniform CO2 
tax on top of the taxes already levied under the ETD to complement the EU emission trading 
scheme (policy option 4). Two transport specific options (options 5 and 6) model the impact 
on the fuel mix of aligning the petrol and diesel rates on an energy content and CO2 basis. As 
opposed to option 5, option 6 requires Member States to respect the relationship between the 
minimum rates in their national tax rates. 

In order to examine the impacts of the policy options, assumptions on the levels of taxation 
had  to  be  made.  For  the  part  of  taxation  based  on  CO2  emissions,  a  range  of  CO2  prices 
covering  the  range  of  price  expectations  inside  and  outside  the  ETS  were  used  in  the 
modelling  (10,  20  and  30€/t).  The  energy  content  pa rt  of  taxation  was  based  on  the  current 
rates of certain heating products and, for motor fuels, on the rates proposed in the commercial 
diesel proposal3. The resulting rates used for modelling options 1 to 6 expressed in the units 
used in the ETD are shown in the following table: 

Table 1: Minimum rates of taxation used for modelling options 1 to 6 (rates on 1/1/2013) in current ETD 
units 

Energy product 

Unit 

Minima as 
set in the 
ETD 

Commercial 
diesel 
proposal 

Option 

1 

2 

3A 

3B 

4 

5 

6 

use 

(non-

Motor fuel use 
Petrol  
Gas oil  
Kerosene  
LPG  
Natural gas  
Heating 
business use) 
Gas oil  
Heavy fuel oil 
Kerosene 
LPG 
Natural gas 
Coal 
Electricity 
Heating  use  (business 
use) 
Gas oil  
Heavy fuel oil 
Kerosene 
LPG 
Natural gas 
Coal 
Electricity 

€/1000 l 
€/1000 l 
€/1000 l 
€/1000 kg 
€/GJ 

€/1000 l 
€/1000 kg 
€/1000 l 
€/1000 kg 
€/GJ 
€/GJ 
€/MWh 

€/1000 l 
€/1000 kg 
€/1000 l 
€/1000 kg 
€/GJ 
€/GJ 
€/MWh 

359 
330 
330 
125 
2.6 

21 
15 
0 
0 
0.3 
0.3 
1.0 

21 
15 
0 
0 
0.15 
0.15 
0.5 

380 
380 
330 
125 
2.6 

21 
15 
0 
0 
0.3 
0.3 
1.0 

21 
15 
0 
0 
0.15 
0.15 
0.5 

380  380
380  380
330  330
125  125
2.6 
2.6 

380  380  380  380 380
380  380  380  438 438
330  330  330  409 409
125  125  125  528 528
na 
2.6 

2.6  2.6 

na 

50 

66 

38.6  60.3  na 
22.2  54.9
24.0  61.8 73.8  42.9  68.0  na 
59.0  34.7  55.0  na 
20.9 
27.6  58.0 71.2  42.5  63.8  na 
na 
0.6 
na 
0.6 
na 
2.16 

0.9  1.2 
1.3  2.1 
0 
1.0 

1.4 
2.2 
1.0 

1.1 
1.9 
0 

22.2  54.9 60.4 
24 
20.9 
27.6 
0.6 
0.6 
2.16

33  60.3  na 
61.8 67.8  36.9  68.0  na 
55.2  30.2  55.0  na 
50 
64.9  35.9  63.8  na 
58 
na 
0.7  1.2 
1.3 
1.1 
na 
1.1  2.1 
2 
1.9 
na 
0 
0.5 
0.5 
0 

na 
na 
na 
na 
na 
na 
na 

na 
na 
na 
na 
na 
na 
na 

3 

COM(2007) 52. 

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Moreover,  two  additional  policy  options  were  identified  to  respond  to  revision  clauses 
contained  in  Articles  9(2)  and  15(3)  of  the  Directive.  Finally,  a  number  of  options  were 
assessed for awarding special treatment to sectors deemed to be at risk of carbon leakage.  

5. 

ASSESSMENT OF IMPACTS 

The  assessment  is  based  on  the  wide  range  of  contributions  from  various  stakeholders 
(Member  States,  businesses,  other  Commission  services).  In  addition,  the  Commission  has 
made  a  qualitative  and  quantitative  analysis,  using  the  results  of  three  models  in  order  to 
assess the impacts (E3ME, TREMOVE, and QUESTIII). 

In  general,  a  more  efficient  tax  structure  in  itself  would  provide  better  and  more  consistent 
price signals and would ensure more effective use of energy taxation both for environmental 
and fiscal purposes. This impact assessment shows that the costs of restructuring the existing 
tax  system  now  would  be  very  low  or  even  negative.  As  far  as  administrative  costs  are 
concerned,  using  the  existing  excise  system  for  the  purpose  of  CO2  taxation  allows 
introducing  a  new  element  in  energy  taxation  without  any  additional  costs  and  without  any 
new administrative burden for companies and tax administrations. 

Macroeconomic  impacts  of  all  policy  options  are  essentially  driven  by  how  Member  States 
use additional revenue. If the revenue is recycled through reductions in labour costs, effects 
on GDP and employment are always positive, although limited in size. As the scale of effects 
depends  on  the  amount  of  additional  revenue  generated,  option  4  yields  the  highest  effects. 
GDP  change  nevertheless  stays  below  1/3  of  a  percentage  point,  whereas  the  number  of 
additional jobs created would grow to just under 1 million in 2030. The effects of the other 
policy options would remain considerably smaller. These trends were confirmed by additional 
modelling  carried  out  on  the  basis  of  updated  baseline  projections  taking  into  account  the 
effects  of  the  financial  and  economic  crisis.  Revenue  recycling  in  the  form  of  lump-sum 
transfers  to  households  or  the  use  of  additional  revenue  for  fiscal  consolidation  does  not 
generate positive GDP and employment effects.  

The  level  of  additional  revenue  for  Member  States  under  the  different  policy  options 
(independently of the question of recycling) was found to depend heavily on how they would 
implement  the  new  structure  and  in  how  far  they  would  make  use  of  the  possibility  for 
exemptions  or  reductions.  An  additional  CO2  tax  of  20€/t  on  all  non-ETS  emissions  has  a 
budgetary potential of about 40 billion € in 2020 for the EU-27.  

The most relevant environmental externality addressed by taxation is CO2 emissions. Under 
all  options  total  CO2  emissions  would  reduce,  up  to  around  2%  under  option  4.  This 
represents about 37% (or 92 million t CO2) of the reduction effort needed outside the ETS if 
one takes into account the baseline emissions as corrected downwards recently. Likewise, all 
options  would,  to  varying  degrees,  provide  a  more  favourable  tax  environment  for  the 
deployment of renewable energies and in particular biofuels. 

Overall  the  ETD  revision  was  not  found  to  produce  negative  income  effects,  but  the 
distributional  impact  varies according  to  the  method  of  revenue  recycling  chosen.  Although 
labour-tax recycling produces the best overall results for household income, it tends to favour 
higher  income  over  low-income  households.  Lump-sum  recycling  avoids  regressive 
distributional  effects  though  at  the  cost  of  producing  a  slight  overall  income  decrease.  A 
parallel increase in transport costs mitigates regressive distributional impacts of heating cost 
increases. 

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As a whole, the sectoral impacts do not raise a concern for adverse competitiveness effects in 
any  of  the  policy  options,  although  effects  are  not  equally  distributed  among  productive 
sectors.  Under  the  assumption  of  labour  tax  recycling,  employment  levels  are  higher  or 
constant in all sectors and only very few sectors experience small output losses. 

As regards the car manufacturing sector, it should be observed that the mandatory alignment 
between  national  rates  for  motor  fuels  under  option  6,  assuming  that  MS  would  keep  their 
petrol  rates  unchanged  and  would  only  increase  rates  on  diesel,  would  only  slow  down  the 
increase  in  sales  of  diesel  cars  (they  would  decrease  by  11.7%  by  2020  compared  to  the 
baseline, which still represents an increase in 9% of sales of diesel cars in absolute figures). 

Option 6, removing the price advantage for diesel both in the EU minima and in national rates 
would  also  have  a  rebalancing  effect  on  the  supply  and  demand  on  the  fuel  market.  Such 
neutral  treatment  of  all  transport  fuels  would  provide  a  technology  neutral  advantage  to  all 
CO2-free fuels and would also encourage energy efficiency. 

6. 

COMPARISON OF OPTIONS 

The  policy  options  were  assessed  against  the  following  key  criteria,  reflecting  the  policy 
objectives  described  in  Chapter  3:  internal  market  and  fair  competition,  environmental 
effectiveness  (CO2  reductions),  budgetary  impacts  and  equity  (among  Member  States  and 
energy consumers). The results are summarised in Table 2: 

Table 2: Comparison of the policy options in terms of selected assessment criteria 

Policy 
option 

Option 1 
Option 2 
Option 3A 
Option 3B 
Option 4 
Option 5 
Option 6 

Internal market 
and fair 
competition 
+ 
- 
++ 
+ 
(+) 
++ 
(-) 

Environmental 
effectiveness 

Budgetary 
impacts 

Equity 

(+)
+
+
(+)
++
+
++

+
-
+
(+)
++
+
++

+ 
- 
- 
++ 
- - 
+ 
+ 

Note: The brackets denote that only half a mark is given. 

All policy options improve the functioning of the internal market as they remove distortions 
between  the  tax  treatment  of  energy  sources.  Distortions  between  Member  States  are  also 
reduced  although  somewhat  less  in  option  3B  because  of  the  transitional  period  for  nine 
Member States and in option 4 imposing an additional tax on top of existing national rates. A 
fairer treatment of ETS versus non-ETS companies is best achieved by the variants of option 
3 which partially alleviate the tax burden on ETS companies by introducing a complementary 
CO2  tax  element  for  all  installations  not  covered.  As  far  as  the  transport  options  are 
concerned,  option  6  is  better  able  to  achieve  equal  treatment  of  energy  sources  (petrol  and 
diesel)  but  on  the  other  hand  might  lead  to  somewhat  higher  divergence  in  rates  between 
Member States. 

Regarding environmental effectiveness, the highest CO2 reductions are achieved under option 
4  which  introduces  a  uniform  CO2  tax  across  the  EU.  As  for  transport  emissions,  the 
TREMOVE  modelling  showed  that  policy  option  6  would  not  only  impact  on  fuel  mix  but 
also on actual consumption thus leading to an overall reduction in CO2 emissions in spite of a 

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certain readjustment in the demand between petrol and diesel in line with the objectives of the 
EU policies and with the CO2 and cars strategy. 

Although  the  budgetary  impacts  would  very  much  depend  on  national  taxation  policies  and 
are  therefore  rather  difficult  to  predict,  some  policy  options  are  more  likely  than  others  to 
create  additional  revenue  or  budgetary  losses.  Option  2  is  the  weakest  from  the  budgetary 
point of view because it restricts the tax base exclusively to fossil fuels consumed in the non-
ETS  sector.  Option  4,  introducing  an  additional  CO2  tax  on  all  non-ETS  emissions,  has  the 
highest budgetary impact. It is estimated that an additional tax of 20€/t CO 2 on all non-ETS 
emissions could potentially generate about 40 billion € in 2020 for the EU-27. 

Equity amongst Member States would best be enhanced under policy option 3B introducing 
transitional  periods  reflecting  the  solidarity  approach  of  the  energy  and  climate  change 
package. Equity among energy consumers can be significantly increased if both heating and 
motor fuel uses are covered by the ETD revision, because such a combination limits potential 
negative distributional impacts.  

Additional policy options 

Repeal of country specific minima for heating gas oil (Article 9.2): The existence of the lower 
minima  for  heating  gas  oil  in  BE,  LU  and  DK  creates  an  undue  advantage  for  business 
consumers in these countries, risking distorting the internal market.  

Making  the  application  of  reduced  tax  rates  to  the  primary  sector  subject  to  environmental 
counterparts (Article 15.3): Article 15(3), with its unconditional exemption possibility, is not 
in  line  with  the  objectives  of  the  Directive  related  to  tax  rate  harmonisation  and  incentives 
towards energy efficiency and emission reductions. Exemptions from or reductions in general 
energy consumption taxation should therefore be made conditional on providing a counterpart 
in terms of increased energy efficiency, while still maintaining a certain margin of flexibility 
for Member States to account fort specificities of the sector.  

Awarding special treatment to sectors deemed to be at risk of carbon leakage: To mirror the 
approach taken under the ETS, the potential risk of carbon leakage needed to be addressed for 
small  installations  within  ETS  sectors  but  excluded  from  the  application  of  the  ETS.  It 
appeared that this can best be achieved with a tax credit for these small installations based on 
past energy consumption of the company multiplied by a fuel benchmark reflecting the CO2 
content of a reference fuel. 

Preferred policy set 

From the analysis of the various options a set of preferred elements was then identified that 
would, taken together, score best against the full set of criteria. Overall, policy option 3 was 
found to provide the best structure by proposing two separate minimum rates – one based on 
energy  content  and  the  other  based  on  CO2  emissions.  Combining  the  somewhat  more 
ambitious rates of option 3A with the transitional periods of option 3B is considered the best 
way  of  combining  environmental  effectiveness  of  the  measure  with  respect  of  the  equity 
criterion.  This  should  be  combined  with  policy  option  6  for  transport,  which  best  ensures 
consistent treatment of energy sources.  

The full set of preferred policy measures is the following: 

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•  Structure and general level of taxation for heating fuels as presented in policy option 3A 
(20€/tCO 2  (2013-2020)  and  30€/tCO 2  (2021-2030),  (0.15  €/GJ  fo r  business  use  and  0.3 
€/GJ for non business use). 

•  Transitional  period  for  nine  Member  States  for  heating  fuels  to  introduce  CO2  based 

taxation until 2020 as contained in policy option 3B. 

•  Taxation of transport fuels on the basis of transport policy option 6. 

•  Repeal  of  country  specific  minima  for  heating gas  oil  in  accordance with  Article  9(2)  of 

the ETD. 

•  Reduction  in  the  CO2  tax  liability  for  small  installations  from  sectors  deemed  to  be 

exposed to a risk of carbon leakage on the basis of a fuel benchmark. 

•  Make the application of tax reductions for the primary sector (Article 15(3) of the ETD), 

subject to the delivery of environmental counterparts in a simplified manner. 

•  Inclusion of biofuels into the list of energy products in the ETD. 

•  Indexation  of  the  minimum  rates  based  on  energy  content  (Annex  14  explains  how  this 
could  be  done  in  practice).  For  the  CO2  part  of  the  tax,  this  should  take  the  form  of  a 
periodic alignment of the minimum rate to the evolution of the market price in the EU of 
the emission allowances based on an evaluation in the Commission report to be submitted 
in accordance with Article 29 of the ETD. 

7. 

MONITORING AND EVALUATION 

Monitoring of taxation of energy consumption is carried out at least once a year through the 
collection of information from Member States on the occasion of the meetings of the Excise 
Committee.  Moreover,  twice  yearly  DG  TAXUD  updates  the  information  database  on  the 
energy tax rates applied by Member States (Excise Duty Tables). 

Moreover, Article 29 of the ETD provides for a regular examination, on the basis of a report 
and,  where  appropriate,  a  proposal  from  the  Commission,  of  the  various  provisions  of  the 
Directive  and  the  minimum  levels  of  taxation.  This  examination  shall  take  into  account  the 
proper  functioning  of  the  internal  market  and  the  wider  objectives  of  the  Treaty.  Once  the 
ETD  will  be  reviewed,  this  examination  will  have  to  focus,  in  particular,  on  how  Member 
States  have  implemented  the  new  framework  for  the  taxation  of  energy  products  and 
electricity  in  their  national  systems,  how  it  has  allowed  them  to  better  integrate  in  them 
environmental and energy efficiency considerations and what is the economic impact, taking 
into account the way in which Member States have used any additional revenue. 

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