A recent report commissioned by the World Bank describes shocking scenarios if climate change isn’t combated, with an estimated increase of 4 degrees Celsius in global temperature during this century, along with heat waves, severe droughts and major flooding as a few consequences. In an effort to address this phenomenon, EU leaders have set ambitious targets to reduce greenhouse gas emissions and to transform the Union into a low-carbon and energy efficient economy. One measure includes legislating on the taxation of energy, to direct consumers into a more efficient use of energy, as well as ushering them into choosing cleaner energy sources. With energy taxation identified as a cornerstone in tackling climate change, the Cyprus EU Presidency has set the progress of the reform of the current Energy Taxation Directive (ETD) as a top priority.
Ahead of the ECOFIN Council meeting on Tuesday, December 4, the Committee of Permanent Representatives (Coreper) has forwarded a comprehensive note prepared by the Cyprus Presidency on the state of play and proposals for future work on the Energy Taxation legislation. The note is the outcome of the intensive discussions in the Council’s Working Party on Tax Questions during the past 6 months on the compromise legislative proposals presented by the Cyprus Presidency.
”It’s an important step as we’ve managed to put into writing the progress we’ve made. The note reflects all the hard work and efforts we’ve put down during the last six months. And with the compromise proposal we now have a text to continue from“, says Nikolas Pavlou, Fiscal Attaché and Chair of the Working Party on Tax Questions in the subgroup that deals with indirect taxation, including energy taxation, during the Cyprus EU presidency.
Back on the right track
The compromise proposal presented by the Cyprus Presidency last September was the first since April 2011 when the European Commission presented its proposal and is perceived to have put discussions back on the right track. A strong majority of Member States now agree on the basic principles of the Cyprus Presidency’s proposal.
”We have been struggling to find the backbone for structure of the taxation system. When we finally got that, we have been able to move on to solve the technical issues”, Mr. Pavlou says.
The basic principles of the compromise proposal are that minimum levels of taxation should be based on two reference components; an energy related component and a CO2-related component. Furthermore, Member States are free to express their national levels of taxation as one single tax or as separate taxes as long as they meet the minimum levels as will be laid down in the Directive.
Bringing legislation more closely into line with the objectives
Energy taxes already exist in all EU Member States and concern energy products used in heating, electricity and motor fuels. At EU level, the current Energy Taxation legislation, adopted in 2003, sets out common rules on what should be taxed, when and what exemptions are allowed and on minimum tax rates for energy products.
After the request by the European Council, in 2011 the European Commission presented a proposal to bring the legislation “more closely into line with the EU’s energy and climate change objectives”. Among the purposes of the Commission’s proposal are to update taxation legislation on renewable energy sources, to ensure consistent taxation on fossil energy sources and to provide a framework for CO2 taxation which would better complement the Emission Trading Scheme, which was launched in 2005.
“It’s an important reform. The current legislation may give incentives for consumers to use dirtier energy sources which pollute more. It’s also important to get rid of the overlapping that exists today between the Energy Taxation Directive and the Emission Trading Scheme”, Mr. Pavlou says.
An invitation to the Irish Presidency
Through the intensive efforts and work undertaken during the Cyprus Presidency, progress on reforming the legislation has taken a great leap forward. The Cyprus Presidency proposes to the Council, through the note prepared for the upcoming ECOFIN Council meeting, to invite the Irish EU Presidency, taking over from 1 January 2013, to continue the work, having as a starting point the last compromise proposal of November 12.
”We’ve set a milestone on the file. With the backing of the Council we would be able to keep the progress we’ve made and ensure that the technical work and discussions will continue from where they stopped during the Cyprus EU Presidency”, Mr. Pavlou says.
The note prepared for the upcoming ECOFIN Council meeting, highlights further challenges which will need to be addressed in order for work to continue, including levels of minimum tax rates, tax treatment of biofuels, bioliquids, commercial gasoil and energy products used for agriculture, transitional periods, and tax reliefs below the minimum levels.
“The fact that the legislation must be passed through unanimity, the consensus of 27 Member States, makes the agreement on this note and on maintaining the approach that the Cyprus Presidency followed in its compromise legislative text even more important as the basis for future discussions”, Mr. Pavlou concludes.
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