11 Taxation
| (32715)
9270/11
+ ADDs 1-3
COM(11) 169
| Draft Directive amending Directive 2003/96/EC restructuring the Community framework for the taxation of energy products and electricity
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| Legal base | Article 113 TFEU; consultation; unanimity
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| Department | HM Treasury
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| Basis of consideration | Minister's letter of 27 September 2012
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| Previous Committee Reports | HC 428-xlix (2010-12), chapter 8 (1 February 2012), HC 428-xxxi (2010-12), chapter 6 (29 June 2011) and HC 428-lvii (2010-12), chapter 5 (18 April 2012)
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| Discussion in Council | Not known, possibly December 2012
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| Committee's assessment | Legally and politically important
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| Committee's decision | Not cleared; further information requested
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BACKGROUND
11.1 Directive 2003/96/EC, the Energy Taxation Directive,
which came into effect in January 2004, provides an EU framework
for taxation of energy products and electricity. It sets minimum
rates of taxation, as well as the optional tax reliefs allowed
by Member States, applicable to energy products when used as motor
or heating fuels and to electricity, rather than as raw materials
or for the purposes of chemical reduction or in electrolytic and
metallurgical processes. In general terms the Directive does
not define structural rules for energy taxation (for example,
the tax base used, such as energy or carbon content, or the differential
between national tax rates on competing energy products).
11.2 Market-based (or economic) instruments (MBIs) are financial
incentives or disincentives used as a tool to address market failures
or achieve other policy objectives. They can take various forms,
such as indirect taxes or subsidies. In April 2007 the Commission
issued a Green Paper to stimulate discussion on developing the
use of MBIs in relation to EU environmental and energy objectives,
including through a revision of the Energy Taxation Directive.[50]
11.3 In April 2011 the Commission presented this draft Directive
to revise the Energy Taxation Directive. In an accompanying Communication
the Commission set out the context and aim of the draft Directive.
It asserted that energy taxes can be used to promote greater
energy efficiency and reduced carbon emissions as well as to raise
revenues. It suggested the aim of the legislative proposal was
to bring the present Energy Taxation Directive more in line with
the EU's energy and climate change objectives and that the proposal
would serve to:
- ensure consistent treatment of taxation of energy sources
and provide a level playing field amongst energy consumers using
different fuels;
- provide a more coherent framework for the taxation
of renewables, and
- provide an energy taxation framework that complements
the EU Emissions Trading System,[51]
whilst avoiding overlap with it.
The Commission argued that it is important to restructure
energy taxation so as to encourage energy efficiency and the use
of environmentally friendly sources. It suggested the draft Directive
would help Member States meet their Europe 2020 commitments on
emission reduction in a cost effective way.[52]
11.4 The draft Directive contains a large number
of complex provisions. In summary they would:
- introduce a new mandatory requirement
for Member States to operate both of two tax bases for the taxation
of energy products — one would be to cover the carbon emissions
associated with the use of energy products and the other would
be to cover the energy content of each product, that is the net
calorific value of each energy product;
- revise the existing minimum rates for energy
products so as to set EU minimum rates for each of the tax bases
and to introduce automatic indexation of these rates by reference
to the EU wide consumer price index;
- require, in addition to the existing requirements
for meeting the EU minimum rates, national tax rates to be structured
in a way that ensured competing energy products were taxed in
relative proportion to their tax base — this would mean
that for the carbon emissions tax base, national tax rates for
competing energy products would have to be set at the same rate
per carbon emission, even if they were above the minimum rate,
and similarly, for the energy content tax base, competing energy
products would have to be taxed at the same rate per energy content;
- introduce new mandatory exemptions from the carbon
emissions tax on energy products subject to the EU Emissions Trading
System; and
- remove or limit various optional tax reliefs,
for example by withdrawing the existing provisions that allow
Member States to tax the commercial use of diesel in the transport
sector at a lower level than diesel put to private use.
11.5 The Commission proposed that a revised Directive
would come into force in 2013, although several provisions would
be phased in up to 2023.
11.6 The draft Directive was accompanied by the
Commission's lengthy impact assessment and a summary of that assessment.
The assessment sought to justify the Commission's proposal on
grounds of subsidiarity, claiming that, although Member States
can increase energy tax rates or introduce a carbon emissions
related tax, single market distortions arise because there is
no harmonised structure. The assessment considered six policy
options on the basis of single market and fair competition, environmental
effectiveness and budgetary impacts. These policy options encompassed
the following ideas:
revision of EU minimum rates on the basis of energy
content;
revision of EU minimum rates on the basis of carbon
emissions;
revision of the structure of the Energy Taxation
Directive, by introducing EU minimum rates based on two elements
— energy content and carbon emissions;
revision of the structure of the Directive, by introducing
an additional uniform carbon tax on top of existing energy taxes;
- restructuring the EU minimum rates for motor
fuels, by incorporating a carbon element in the commercial diesel
rates and aligning the energy tax base on the same value per energy
content;
- restructuring the EU minimum rates for motor
fuels, by requiring that the relationships between minimum rates
(the "relativities requirement") are the same for those
set at national level.
The Commission's preferred policy contained elements
from several of the six options. The assessment recognised that
the budgetary and economic impacts depend on how Member States
choose to implement the proposals and that they are therefore
difficult to predict.
11.7 When we first considered this proposal,
in June 2011, we said that:
- clearly it posed significant
problems;
- a review of the Commission's impact assessment
and Explanatory Memorandum had led us to question whether the
predominant legislative purpose of the proposal was compliance
with energy and climate change objectives, rather than the good
functioning of the internal energy market that could only be achieved
by harmonisation of energy taxes in Member States;
- we would like the Government's views on this;
- we very much shared the Government's subsidiarity
concerns about the proposed structural provisions to define the
tax bases of Member States' energy taxes and the provisions to
define the differential between national tax rates on competing
energy products;
- if we had been able to consider this matter earlier
we would have recommended the House to adopt a Reasoned Opinion
on these issues, as provided for in Protocol (No 2) to the EU
Treaties; and
- as part of our political dialogue with the Commission,
our Chairman was, however, writing to its President to express
the extent of our concerns, as in an annexed text.
11.8 As for the remainder of the content of the
draft Directive, we noted the various difficulties for the UK
described to us by the Government. So before considering the matter
further we asked to hear about progress in negotiations in addressing
those difficulties. And in that context we were encouraged that
the Government's hand was strengthened by the need for Council
unanimity on the proposal.
11.9 When we considered the matter again, in
February this year, we heard, in relation to our comments about
the legal base, that:
- the Government had considerable
sympathy with our comments;
- in principle the Commission could have used a
Treaty base appropriate for legislation primarily containing fiscal
provisions aimed at environmental objectives, that is Article
192(2)(a) TFEU, rather than the single market Treaty base for
indirect tax measures, that is Article 113 TFEU;
- the Government's objections and views on the
proposal would not, however, materially change;
- it would continue to have serious doubts that
such a proposal met the subsidiarity test even when viewed through
an environmental prism, given that there would be no amendment
to the greenhouse gas limits;
- rather than lowering emissions as such, the proposal
would force Member States to deliver the previously agreed level
of emissions reduction through changes to the energy tax rules;
- either legal base required agreement on the basis
of unanimity;
- this remained consistent with the Government's
position and, as we had noted, strengthened its hand in the negotiations;
and
- the Government noted that we share its subsidiarity
concerns and it had registered these concerns during negotiations
on the proposal.
11.10 We also had an account of progress on the
negotiations and learnt that, given the complex and contentious
nature of the proposal, the Government expected that they would
go on for some considerable time and that any agreed revision
of the present Directive was likely to be significantly different
to the Commission's proposal.
11.11 We said that, whilst we understood the
point about the Government's view of the proposal, and the need
for unanimity, whichever legal base was used, we would suggest
that the Government ought, as a matter of a principled approach
to law-making, to insist in the Council that EU legislation be
based on the correct Treaty provision. We asked the Government
to respond to this suggestion. And we noted also that the Commission
had not responded to our own representations on this issue and
we were pursuing this. As for the progress of negotiations we
looked forward to further accounts of developments in due course.
11.12 In April we considered a further response
from the Government, primarily about our comments on the legal
base for the draft Directive. We heard that:
- the Government had noted our
suggestion that it ought, as a matter of a principled approach
to law making, to insist that EU legislation be based on the correct
Treaty provisions;
- the Government agreed with this general principle;
but
- in the specific context of this proposal it felt
a case could be made either way as to which is the 'legally correct'
Treaty base in relation to the revision of the Directive.
11.13 We commented that:
- we recognised that there is
scope for a difference of opinion on which is the predominant
objective of this proposal;
- nonetheless, as we had said before, our analysis
was that this proposal pursues primarily energy and climate change
objectives; but
- we saw no purpose in pursuing the matter further.
11.14 We also considered then a response to our
letter to the Commission. We commented that:
- we regretted that the Commission
had taken a little over six months to reply to our letter and
that it did not satisfactorily address the subsidiarity concerns
we had raised; and
- this was, however, a matter, not for our relationship
with the Government, but with the Commission.
11.15 As for the progress of negotiations we
continued to look forward to further accounts of developments
in due course. Meanwhile the draft Directive continued under scrutiny.[53]
THE
MINISTER'S
LETTER
11.16 The Economic Secretary to the Treasury
(Sajid Javid) writes to update us about this proposal in the light
of a discussion at the ECOFIN Council on 22 June, held at the
end of the Danish Presidency, and Cypriot intentions for taking
the matter forward during its Presidency. He says that:
- progress under the Danish Presidency
was slow and uneven;
- it became fairly clear at an early stage that
its original aspiration to secure Council agreement to a general
approach by the end of its Presidency was overly ambitious; but
- at the ECOFIN Council the Presidency was able
to secure agreement of 26 Member States (with Poland dissenting)
to a set of orientations to guide future work.
11.17 The details that the 26 Member States agreed
that:
- minimum tax levels should be
laid down in the Directive and these rates should take as their
reference points the energy content and carbon dioxide emission
levels of energy products;
- the concrete means to do this should be further
explored in a pragmatic manner;
- Member States should retain maximum flexibility
to determine the structure of their national energy taxes, provided
that the minimum levels are respected; and
- the "proportionality principle" of
the Commission proposal (referred previously to as the "relativities
requirement") "may" have to be deleted and the
Directive should ensure equal access for all to tax reductions
or exemptions regardless of the structure of their national tax
systems.
11.18 The Minister comments that:
- the Government welcomes the
progress made at the Council;
- in particular it strongly supports the clear
statement that Member States should be free to structure their
national tax systems as they wish provided that EU minimum rates
of taxation are respected;
- the Government also welcomes the explicit recognition
that the proportionality principle is unlikely to be negotiable;
- it is already clear that the Cypriot Presidency
intends to delete the principle from the proposal in taking the
proposal forward;
- taken together these two developments remove
many of the most problematic elements of the Commission's proposals
for the UK, with a focus instead on the EU agreeing minimum rates
rather than prescriptive rules on the structure of national taxation
— this approach is in line with that taken in the current
Directive;
- on the issue of the level of minimum rates, the
Government is open to the principle that energy content and carbon
emissions should be factors in setting minimum rates for different
fuels to improve the environmental coherence of the Directive;
but
- in practice it seems highly likely that, to secure
agreement, other social and economic factors will also need to
be taken into account one way or another in setting the matrix
of minimum rates.
11.19 The Minister continues that:
- as we have been told previously,
the Government will scrutinise very carefully any proposals that
would require an increase in UK duty rates;
- the Cypriot Presidency intends to hold up to
five Council working group sessions during its Presidency and
hopes that the ECOFIN Council will be able to reach a political
agreement on certain key points before the end of the year;
- negotiations will, however, remain difficult,
particularly on the very sensitive issue of the level of minimum
rates;
- the Government would not therefore expect final
agreement to be reached under the Cypriot Presidency;
- indeed, in practice the early indications are
that it will avoid any discussion of the level of minimum rates
and instead focus on turning the orientations agreed by 26 Member
States in June into a (inevitably partial) legislative text; and
- apart from deletion of the proportionality principle,
initial Presidency drafts of texts for the opening articles of
the Directive suggest that the Presidency also favours deleting
the automatic indexation of minimum rates — it will have
the strong support of the Government on both points.
CONCLUSION
11.20 We are grateful to the Minister for his
account of developments on this proposal and note the progress
in meeting some of the Government's concerns. However, before
considering this matter further we should like to hear, before
any political agreement or general approach, partial or otherwise,
of further developments. Meanwhile the draft Directive remains
under scrutiny.
50 (28524) 8255/07 + ADD 1: see HC 41-xx (2006-07),
chapter 4 (2 May 2007) and HC 41-xxxiii (2006-07), chapter 19
(2 October 2007). Back
51
See http://ec.europa.eu/clima/policies/ets/index_en.htm. Back
52
(32716) 9267/11: HC 428-xxxi (2010-12), chapter 6 (29 June 2011). Back
53
See headnote. Back
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