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«a study by Analysis by Transport & Environment, with data support from CE Delft Published by Transport & Environment For more information, contact: ...»

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Europe’s tax deals for diesel

October 2015

a study by

Analysis by Transport & Environment, with data support from CE Delft

Published by Transport & Environment

For more information, contact:

Carlos Calvo Ambel

Policy Analyst

Transport & Environment


Tel: +32(0)2 851 02 13

a study by

Executive summary & policy recommendations

Low oil prices – ideal time to act

At the time of writing, the oil price was some 70% below its 2008 peak and some 60% below its post-crisis 2012 peak. Although the price was still significantly above the 1998 lows of $10barrel, any notion of ‘peak oil’ has well and truly vanished from the energy agenda.

In addition, Europe is gripped by the diesel NOx scandal – Volkswagen admitted to having used a ‘defeat device’ to artificially lower emissions in the test but not on the road. It was long known that NOx emissions from new diesel cars hardly decreased in the last decade despite progressively more stringent standards. Numerous cities around Europe struggle with the air quality consequences and the continent is rethinking its strategy of stimulating diesel through lower diesel taxes.

Since Europe imports almost 90% of its oil, cheap oil is a short-term economic boon for EU countries but a substantial long-term threat. A low oil price threatens progress made on energy efficiency and the reduction of carbon emissions. The increase in oil prices in the last decade helped Europe achieve a 10% decrease in transport fuel consumption and CO2 emissions since 2007, overturning trends of rising transport oil use that started with the advent of the combustion engine a century ago.

Raising transport fuel taxes now increases the economic benefits, and locks in the progress in energy efficiency that the transport sector has achieved. Higher transport fuel taxes can help

Europe achieve economic, social and environmental objectives in five ways:

1. It will stimulate all possible avenues for lower oil use and reduce transport CO2 emissions. Europe’s comparatively high fuel taxes are the main reason Europeans use around 60% less fuel per head than Americans. Fuel taxation will be key in honouring the recent commitment to cut non-ETS emissions by 30% in 2030 compared with 2005 levels;

2. It will help tackle unemployment especially if proceeds are used to cut taxes on labour;

3. It will help boost Europe’s domestic spending, creating wealth and jobs;

4. It will shift oil rents from governments from producer countries (Russia, Middle East) to governments from consumer countries (the EU) and offers geopolitical dividends;

5. It will help industrial innovation as consumers have greater incentives to buy more fuelefficient vehicles.

Europe’s fuel tax policy faces two challenges The first is to align tax rates for petrol and diesel used by cars. The current indirect • subsidy for diesel compared with petrol tax leads to air quality problems as highlighted in the recent NOx cheating affair. Numerous publications also conclude that the subsidy is not beneficial for the climate because it enables low-cost mobility, bigger and heavier vehicles, and has caused Europe to be a ‘diesel island’ in a world dominated by petrol drivetrains in cars.

The second is to avoid a tax race to the bottom on diesel used by trucks. For small, • central EU member states it is extremely attractive to tax diesel for trucks at the minimum rate because it seduces hauliers to fill up their huge tanks on their territory, which boosts revenue. Luxembourg is an obvious example, but is by no means the only one. In turn, this makes it much more difficult for other countries to raise truck diesel

–  –  –

How Europe has been taxing fuels This study is an update of an earlier study published in 2011 that analysed fuel price and tax trends in Europe since 1980. This report adds a specific analysis of diesel tax paid by trucks, as well as how fuel tax revenues have evolved as a share of total tax revenues and GDP. Its main

conclusions are:

Fuel tax and revenue trends

In 2014, the average road fuel tax paid by motorists and hauliers, excluding VAT, was • €0.52 which, corrected for inflation, is 20% below the 2000 level of €0.64/l. This surprise finding can be explained by: 1) inflation eroding nominal tax rates; 2) a shift from petrol to lower-tax diesel fuel; and 3) diesel tax rebates for trucks that have been introduced by eight countries over the past 15 years.

Total tax revenues, in real terms, excluding VAT, have been decreasing over time too. In • 2000, they were around €200 billion, in 2014 they were down to €167 billion. They have also plummeted as a percentage of GDP, from 1.7% to 1.2% in 2014. They have also fallen as a percentage of total tax revenues, from above 6% in 2000 to below 5% in 2014.

Fuel for cars: trends in alignment of tax rates for petrol and diesel

The gap between petrol and diesel taxes in Europe is quite unique in the world and is the main reason why diesel engines have taken off in Europe and not worldwide. Ravaged post-war Europe needed tax revenues, petrol was used by well-off people able to afford a car, hence governments started to tax it. Diesel was used by trucks and was lightly taxed or not at all.

The weighted-average fuel price paid by motorists in 2014 was €1.39 per litre and the • price at the time of writing (early September 2015) was €1.24. This is around 20% below the peak prices both in 2012 and the early 1980s, which were over €1.50 in real terms.

The gap in tax levels for diesel and petrol paid by motorists is currently €0.14/l which is • 30% lower than petrol per unit of energy or tonne of CO2. Over the past 15 years, the gap has been coming down but very slowly, at a rate of around half a cent per litre per year.

The indirect fuel subsidy per diesel car, assuming it consumes 15,000 litres of fuel over its lifetime, and including 21% average VAT, currently amounts to €2,600;

Differences across the EU vary from zero (UK) to €0.28/l (the Netherlands); per unit of • energy that is 10 to 44% lower tax on diesel than on petrol;

Italy, Finland, Sweden and Austria are the main countries that have taken voluntary • action to close the gap by several cent over the years. In Greece the gap has actually increased significantly because petrol tax was raised in the budgetary crisis and diesel tax was not.

Diesel tax for trucks: a race to the (€0.33/l) bottom Trucks pay on average €0.44/l diesel tax in the EU now, €0.04 below the rate cars pay and • 15% below the inflation-corrected €0.52/l they paid in 2000. Truck diesel tax rebates totalled around €4.5bn in 2014, up from €0 in 1999.

–  –  –

The number of countries that tax truck diesel at or close to the minimum level is now 10.

• Over the past years, Belgium, Greece, Hungary and Latvia have joined. Finland has worked to increase their truck taxes, which are currently far from the minimum.

Policy recommendations It is crucially important for Europe to address the twin diesel tax challenge: to align petrol and diesel tax rates for cars, and to end the ‘race to the bottom’ in diesel tax rates for trucks. The timing is right: oil prices are low, Europe has committed to 2030 climate and energy targets, and there is more and more recognition of the need to end subsidies on diesel fuel.

Voting on tax issues is still subject to unanimity in the Eurozone and the wider EU alike, which is an important explanation why three previous attempts to reform fuel taxation at EU level have failed. Still we believe a new attempt is needed that draws lessons from previous experieness

listed below:

A 2002 proposal (2002/410) would harmonise truck diesel taxes. This proved a bridge too • far; setting maximum levels is unnecessary;

A 2011 proposal (2011/169) would have mandated all member states to align petrol and • diesel taxes. This was a bridge too far in another way because it does little or nothing to solve the truck diesel tax ‘race to the bottom’ issue. It also proposed – contentiously and unnecessarily – to split tax levels in a CO2 and energy component;

A 2007 proposal (2007/52) would raise the EU minimum tax for diesel from to €0.33/l to • €0.38/l. This addresses both the alignment and tax competition issue and is the most pragmatic way forward. It failed primarily because of high and climbing oil prices at the time and the lack of recognition of the need to end diesel’s tax favours.

Our short-term recommendation is to revisit the 2007 proposal, raise the general minimum level for diesel significantly, and correct it for future inflation. It should be complemented by a truck road-pricing scheme with clear CO2 differentiation. Even if fuel tourism would continue to exist, member states could actually take their own decisions without necessarily having to look to their neighbours for action.

Our long-term recommendation is for the EU to really solve the diesel tax competition issue without needing harmonised tax rates – and actually leaving member states freer than today.

The United States and Canada have the International Fuel Tax Agreement (IFTA), which enables states and provinces to tax truck diesel on the basis of where the trucks drive, not where they fill up. This eliminates all incentives for states to become a ‘fuel tax havens’ because lowering tax rates decreases, not increases, revenues. The EU can do the same. What needs to be implemented is the automatic registration of diesel use per truck per country and a payment system. In technical and administrative terms this is not difficult. But it is a change, and change requires political commitment. This report shows it is worth it.

–  –  –

a study by

1. Introduction

1.1. A decade of EU inaction on fuel taxes Since the EU was enlarged in 2004, the Energy Taxation Directive (ETD) has not been updated. The legislation sets a minimum tax rate for energy products, including oil, coal, natural gas and electricity.

Many things have changed since it was passed back in 2003. The EU now has 28 member states, while the last revision was approved in union with only 15 member states – mostly in western Europe. Back in 2000, only 32% of new cars sold were diesel1. Currently, most cars sold in the EU run on a diesel engine (53%2), which, according to the European Environmental Agency, “is contributing to air quality problems”3. Issues such as fuel tourism are increasing, with more countries every year implementing fuel taxes rebate systems.

In 2011, T&E published a report4 on the evolution of fuel taxation in Europe. Four years and one failed attempt to update the ETD later, it’s time to take stock of the progress to date and update the study to take account of the latest developments. This report also highlights the importance of fuel taxation in tackling climate change and meeting the EU’s 2030 goals. Transport is the only sector that has increased its emissions since 1990 and transport’s share of overall EU total greenhouse gases (GHG) is growing. With new climate targets in place for 2030 – in particular for the non-ETS – measures need to be taken to ensure that transport contributes its fair share. This time, the study includes new dimensions that were not included in the previous one. A specific chapter on trucks summarises the numerous tax benefits they enjoy in the EU’s member states.

This report focuses on petrol and diesel use in road transport. The EU, through its recently launched Energy Union, is trying to build an energy-efficient, low-carbon and energy secure Union. But too much of the Energy Union’s focus has been on gas. Indeed, currently 94% of transport relies on oil products, of which 90% is imported5. More than a quarter of all final energy consumed in the EU is used by road transport6. Ensuring the right taxation of fossil fuels in road transport, the main user of oil products, is key to achieving the Energy Union’s objectives.


Objectives of the study

The objective of this study is threefold:

• To analyse the importance of adequate fossil fuel taxation for the decarbonisation of the road transport sector in the EU;

• To assess the environmental, social and economic impact of the EU’s failure to update the Energy Tax Directive;

• To explore alternative solutions to deal with road fuel taxation.

1.3. Structure of the paper The next chapter explains why adequate levels of fossil fuel taxes are important from a climate, economic, innovation and energy security point of view.

Then we review recent efforts (and failures) to update the ETD. This includes an analysis of how currently low oil prices present a political opportunity to reverse the situation.

ACEA, 2015. http://www.acea.be/statistics/tag/category/diesel-penetration ACEA, 2015. The Automobile Industry Pocket Guide.

EEA, 2015. The European Environment. State and Outlook 2015. Synthesis Report.

Transport & Environment, 2011. Fuelling oil Demand. What happened to fuel taxation in Europe?

EC, 2015. A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy.

EC, 2014. EU transport in figures. Statistical Pocketbook 2014.

–  –  –

We dedicate a chapter to bring together and analyse all fiscal advantages trucks benefit from in the EU.

This is followed by a chapter with some specific case studies on practices in EU member states when it comes to fuel taxation.

The last chapter proposes different alternatives on how to solve the issues discussed in the previous chapters.

2. Why have high fuel taxes?

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