Brussels will announce a strong tax hike to pay for the green transition

The European Commission is finalizing an energy reform to achieve the 55% emission reduction target set last September by President Ursula von der Leyen.

The Vice-President, Frans Timmermans, will present on July 14 the first part of an ambitious package of measures called “Fit for 55” in which it will include the revision of the directives on energy taxation, renewables, energy efficiency or the emissions trading system with which he intends to accelerate the ecological transition.

The proposal being prepared by Timmermans will put on the table an increase in energy taxes to align European taxation with environmental objectives. After the failure of the previous revision attempt – which was presented in 2011 and withdrawn in 2015 – the EU Executive will now try to apply a profound transformation to the European tax systems so that they are in line with the objectives set out in the European Climate Law.

According to the first documents to which this newspaper has had access, the Commission will include a review of the minimum rates of excise duty. This update will take into account aspects such as inflation, energy content (to make energy taxes as little distort as possible) or the link with greenhouse gases (to complement the price signal outside the EU emissions trading system).

Also, after three years of work, the Community Executive will address the fiscal differentiation by sectors. This revision will make it possible to separate motor fuels from heating fuels, giving the possibility of applying differentiated rates, exemptions and reductions as is the case, for example, in the maritime or aviation sector that currently have exemptions for kerosene or fuel used by ships. Kerosene is expected to begin to face a higher tax burden.

The Commission’s focus will also be on addressing fossil fuel subsidies and avoiding inconsistencies between taxes and the emissions trading system, as well as with the Renewable Energy Directive and the Efficiency Directive.

Brussels wants to solve the problem of some new energy products that maintain a taxation similar to traditional products (for example, advanced alternative fuels in transport, which may include electricity) to facilitate and enhance their use.

According to the Commission’s impact analysis, tax increases for fossil fuels in the transport or heating sector provide powerful incentives for behavioural change, in the short term, but warn that consumers may not be able to easily alter their consumption patterns when it comes to a significant part of their income. For this reason, the Community Executive undertakes to evaluate it carefully and defends compensation measures such as lower direct taxes or taxes on work.

“Compensating people with lower incomes could tackle the potential undesirable redistributive effect of this potential energy tax increase,” they conclude. In addition, the Commission argues that the Green Deal Investment Plan and the Just Transition Mechanism will contribute to addressing transitional investment needs, including in the most affected areas, as well as energy poverty issues.

Emission allowances

As part of the same package, the Commission will propose new and reformed pricing mechanisms to support the EU’s climate objectives, in particular a carbon border adjustment mechanism (BCAM) and a proposed revision of the EU Emissions Trading System (ETS).

The EU Emissions Trading System (ETS), the EU’s instrument for measuring and pricing CO emissions₂ per unit, it will reduce the number of annual fees in the EU to move from the so-called phase 4 (2021-2030) in which a reduction of 40% was expected to the new target of 55%. This measure is expected to raise the price per tonne considerably. In addition, it is expected to expand its scope to other sectors such as aeronautics. To achieve this, the EU will differentiate between intra-EU and international flights. For community flights, the emissions trading scheme will be applied and for the rest the Corsia program, which will have to be reviewed for the lower emissions registered in 2020 due to the pandemic.

Adjustment mechanism

On the other hand, the Commission has also made progress in creating an adjustment mechanism at the carbon frontier. The idea of this measure is to promote the adoption of emission reduction policies in other countries while maintaining the internal competitiveness of European companies.

The European Parliament has instructed the Commission, in order to avoid possible distortions in the internal market and along the value chain, to cover all imports of products covered by the EU ETS, including where they are implicit in intermediate or final products; stresses that, as a starting point (by 2023), and following an impact assessment, it should cover the electricity sector and energy-intensive industrial sectors, such as cement, steel, aluminium, petroleum refining, paper, glass, chemicals and fertilisers, which continue to receive significant free allowances and still account for 94% of the EU’s industrial emissions.

The report drawn up by Parliament calls for the elimination of all environmentally harmful subsidies to industries in such a way as to comply with the polluter pays principle and recommends that an independent body should oversee this new levy which could end up being used to finance the European Union. However, MEPs ask that the rule be approved with the WTO agreement since countries such as the United States, China or Brazil have already shown their opposition to it by considering it a protectionist measure.

Eurovignette

Another of the revisions that come in the package is that of the Eurovignette and _CO2 emission standards to decarbonise road transport.

The use of road infrastructure by heavy-duty vehicles is regulated by the Eurovignette Directive. The review of this dossier has entered the final stages of the decision-making procedure. In fact, the European Council reviewed it on 3 June.

The co-legislators are currently negotiating whether to replace time-based road charges with distance-based charges, in order to implement the ‘polluter pays’ principle, according to which the polluter bears the cost of its pollution, as envisaged by the Commission in its original proposal.

Several countries have asked for flexibility in the application of this measure in order to be able to move forward and, for the moment, the Portuguese Presidency has presented a compromise proposal that seeks to reach an agreement between all parties and that could take place in a third trilogue to be held on this measure.

The decarbonisation of heavy road transport will also be incentivised by the introduction of a new system of variable road charges based on CO emissions._2. In addition, the revised draft text of the Eurovignette allows discounts for zero-emission vehicles, thus encouraging the shift towards clean alternatives.

As regards passenger cars and light vehicles, responsible for 75% of CO emissions₂ of EU road transport, the Commission will present the revision of the Regulation setting co emission performance standards₂ of cars and vans to make them “suitable for 55”.

The objective of reducing CO emissions₂ of the cars, currently set at 15% by 2025 and 37.5% by 2030 compared to 2021 levels, are expected to sharpen to have at least 30 million zero-emission cars on European roads by 2030.

According to Dr2 Consultores, the various carbon pricing measures in the road transport sector are expected to stimulate market demand for zero- and low-emission vehicles for both passenger and freight transport.

Renewables Directive

With regard to the new renewables directive, the EU is working on raising the targets to a figure of between 38 and 40% although the sector has demanded that it be increased to 45%.

The revision of the directive will include a boost to renewable energies used in heating and cooling, with a new binding target of an annual increase of 1.1 percentage points.

The EU executive is considering a ban on fossil fuels in district heating.

In addition, the target for the use of renewable energy in transport could be increased from 14% to 26% and increased for advanced biofuels from 3.5% to 5.5%, with the introduction of an aviation-specific supply obligation.

The employers’ association Gasnam together with Repsol and 222 other associations, companies, universities and technology centres has sent a joint letter to the European Commission requesting that the contribution of renewable fuels to achieve the climate objectives of transport be considered. For this it is necessary to modify the approach of the current regulation that considers only the emissions in the tailpipe of vehicles, which does not guarantee the transition towards carbon-neutral mobility.

The Commission has also listened to some of the calls from the wind sector and is considering increasing cross-border cooperation on renewable energy on the high seas, with the obligation for EU Member States to cooperate within each sea basin, and to create a one-stop shop for the authorisation of cross-border offshore wind projects.

It is also proposed to create an EU benchmark for the use of renewable energy in industry, including labelling for green industrial products in certain sectors and a certification scheme for renewable and low-carbon fuels.

The Directive will also include possible national ceilings for the use of stemwood above a certain size for energy and a reinforcement of the use of geothermal energy.

The European Commission expects to allocate 37% of the 750,000 million of the Next Generation fund to the ecological transition and for this it plans to issue up to 30% of this money through green bonds.

The European Green Deal, launched on 11 December 2019, aimed to make Europe the first climate-neutral continent by 2050, safeguard biodiversity, establish a circular economy and eliminate pollution, while boosting the competitiveness of European industry and ensuring a just transition for the regions and workers concerned.

With the announcement of the European Green Deal in her first hundred days in office, Commission President Ursula von der Leyen pledged to increase the European Union’s emissions reduction target by 2030.

In his State of the Union address on 17 September 2020, he proposed that the reduction target be set at 55%, along with a review of EU climate and energy legislation by June that has finally been delayed by a few weeks.

On the same day, the EU adopted the Communication “Raising Europe’s climate ambition in 2030 – Investing in a climate-neutral future for the benefit of our citizens” (commonly known as the EU’s 2030 climate targets plan). It also includes an updated 2030 emissions reduction target of 55% net compared to 1990 levels, from the current 40% emissions reduction target.

The communication is based on a comprehensive impact assessment and a public consultation carried out during spring 2020. The analysis concludes that the current policy framework is insufficient. If the current policy framework and legislation are not amended, the European Commission’s communication envisages a reduction in emissions of only 60% by 2050, i.e. far removed from the neutrality target and the future of negative emissions.

Source: The Economist