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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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Espey, 2008. Gasoline demand revisited: an international meta-analysis of elasticities CE Delft, 2010. Price sensitivity of European road freight transport – towards a better understanding of existing results.

Li, S. et al, 2013. Gasoline Taxes and Consumer Behavior.

McGlade & Ekins, 2015. The Geographical distribution of fossil fuels unused when limiting global warming to 2°C.

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In 2011 the EC proposed a revision of the ETD. It intended, among other things, to have the same taxes for both diesel and petrol, while being adjusted every three years based on inflation. It also proposed introducing a CO2 element into energy taxation: the higher the emissions of a particular fuel were, the higher the CO2 tax would have been, rewarding greener energy sources37.

On April 2012, the European Parliament rejected the proposal of the Commission – although strictly speaking it wasn’t a co-legislator. MEPs rejected the proposal because, among other reasons, it would mean a double burden for sectors already affected by the ETS. There were apparently concerns that a revised ETD could further depress ETS carbon prices38 and, of course, it was also seen as an increase in prices at a time of economic crisis. Member states were not able to reach an agreement and so the 2003 Directive continues to regulate energy taxes. One key challenge is that each of the 28 member states has a veto when it comes to tax issues which effectively gives fuel tax havens a veto over EU fuel policy.

From July 2014 oil prices have fallen by more than half. In January 2015 EU nominal average prices for diesel and petrol, including taxes, were at the lowest level since 201039, even without factoring in inflation.

Still, from a historic perspective oil prices remain high. Not so long ago, oil prices above $30 were considered so high that they could even lead to a global recession40. In September 2015 oil prices stood at around $45/barrel. It is unclear how long oil prices will remain at this level but there are a number of reasons for adjusting the way we tax fuel in the EU.

4. Fuel taxes – what happened in EU countries In the previous sections we explained the use and importance of setting high fuel taxes. This section investigates whether that has happened. In order to answer that question we use an entirely up-to-date database with fuel prices, fuel taxes, inflation and fuel consumption figures since 1980. The database was developed by consultancy CE Delft in the early 1990s and since then has been regularly updated for, among others, the European Environment Agency’s (EEA) Transport and Environment Reporting Mechanism (TERM) reports. The last update took place in February 2015 when average fuel prices and inflation figures for the year 2014 were added. Truck-specific information was also added, although more detailed information is included in a later section.

4.1. Methodology Fuel price and tax data in the database come from the European Commission’s Oil Bulletin (http://ec.europa.eu/energy/observatory/oil/bulletin_en.htm). Data is available for leaded premium petrol (not in use anymore), unleaded Euro 95 and automotive diesel, and separated into pre-tax prices, excise duty and VAT. Inflation and fuel consumption data come from Eurostat. Putting these data together allows calculation of inflation-corrected, sales-weighted average (petrol plus diesel) prices and taxes over time, for each EU member state. Annual averages are calculated by taking five quarterly data points, January, April, July and October of the year in question, and January of the next year. Sales-weighted averages for petrol and diesel have been calculated on an energy basis and the resulting prices are presented for a litre of fuel with energy content between that of petrol and diesel. In countries with little European Commission, 2011. Revision of the Energy Taxation Directive – Questions and Answers.

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Corporate Europe Observatory, 2014. Life beyond emissions trading https://ec.europa.eu/energy/en/statistics/weekly-oil-bulletin The Guardian, 2000. Oil price back over $30 per barrel. 17/02/2000.

a study by difference between petrol and diesel prices and where petrol has a high share of the fuel market, this can lead to the ‘weighted average’ fuel price being above the individual ones for petrol and diesel. (See, for example, the UK graphs at the end of this report.) Complete records since 1980 are only available for the nine member states that made up the EU in 1980: Germany, France, Italy, UK, Netherlands, Belgium, Ireland, Denmark and Luxembourg. Together these nine countries (still) account for two-thirds of EU28 fuel consumption. EU12 data (including Greece, Spain and Portugal) are available as of 1986, EU15 (including Sweden, Finland and Austria) as of 1995, EU25 as of 2004, and EU27 (including Romania, Bulgaria) data as of 2007, and EU28 (including Croatia) as of the second half of 2013. All country-specific graphs can be found in Annex I.

4.2. General trends 4.2.1. Inflation eroding fuel taxes The European Central Bank defines inflation as a broad increase in the prices of goods and services, not just of individual items41. As a result, you can buy less for €1 as time passes by. Inflation marks the difference between nominal and real prices: the first one determines the price on a price tag at a certain moment in time, while the latter is an adjusted value that reflects how much something would cost now considering inflation. Real price is the right way to look at the cost of a good if we want to see if something is cheaper or more expensive now that in the past.

The graph below42 shows the evolution of diesel and petrol prices in the EU since the beginning of the 1980s in real terms. The weighted-average fuel price in 2014 was €1.39 per litre. The graph does not show developments since; on 1 September 2015 the weighted average was €1.24 per litre. The latter is more than 25 cent below the 2012 peak price and 16 cent below the peak prices in the early 1980s. The graph shows that in the early 1980s the correlation in price between petrol and the mix was strong, as it was the most used fuel. However, over time, a strong correlation can be observed between diesel and the mix, as diesel is the main type of fuel currently being sold in the EU (more than twice the amount of diesel was sold in the EU in 2014 than petrol). The graph includes all taxes, including VAT. As explained in a later chapter, commercial vehicles benefit from some exemptions, so the real price they pay is significantly below what is shown in the graph, and real weighted average fuel prices are lower too.

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European Central Bank, 2015. ECB: What is inflation?. ECB website, consulted on May 2015.

See methodology to see which member states were included in each period: EU9 as of 1980, EU12 data as of 1986, EU15 as of 1995, EU25 as of 2004, EU27 as of 2007, and EU28 as of the second half of 2013.

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The graph below shows that, contrary to popular belief, when inflation is considered, fuel taxes in the EU have constantly decreased from a peak at the end of the century. In 2014, they were 20% lower than in 2000 (€0.64 vs. €0.50). The graph does not include the special conditions that trucks benefit from, such as tax-rebates, which are analysed in detail in a later chapter.

The ETD is partially responsible for this drop. The legislation did not reflect a periodic review of the minimum tax levels at an EU level. Consequently, member states do not have the obligation to keep fuel taxes at pace with inflation.

On top of that, the fact that diesel has lower taxes also explains the drop. In 2000, diesel represented 53% of all fuel sales. In 2014, it went up to 70%. Therefore, the average fuel tax is also lower overall.

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4.2.2. Shrinking revenues and missed climate opportunity If we assume that sales-weighted average fuel taxes would have remained at 2000 levels – i.e. without the €0.14/l drop that actually happened – the sale price (including VAT) would have been roughly 14 cent higher in 2014. Instead of an average price of €1.39, fuel would have costed €1.53. That represents a 10% increase in price. Given the elasticity of demand explained in a previous section, the consumption of transport fuel, and therefore its associated CO2 emissions, would have been 6% lower.

2013 and 2014 data is still not available, but in 2012 road transportation emissions in the EU were 843 Mt of CO2 equivalent. That would have saved, only in 2012, more than 50 Mt of CO2, equivalent to Portugal’s total annual CO2 emissions. If upstream emissions (associated with oil extraction, refining and so on) had also been incorporated, the emissions saving would have been 10% higher.43 The cumulative impact of such policy would have been much greater. Considering stable demand if taxes would have been lower (first-order response), member states would have received €36 billion in additional revenues if taxes would have been kept at 2000 real levels.

The relative increase in emissions due to upstream processes is based on the EC impact assessment for the amendment of regulation 443/2009 and 510/2011

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When revenues for governments are analysed, we see they have been decreasing, both in absolute terms and as a percentage of the total collected tax revenues (see graphs below).

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4.3. Gap between diesel and petrol In recent decades, there has been a tax policy throughout Europe that favours diesel over petrol. As can be seen in figure 4, there has always been a gap between diesel and petrol fuel taxes. Although the gap has decreased over time, in 2014, the sales-weighted average gap was more than €0.14/l. In some member states, such as the Netherlands, the difference is even €0.28/l. Only the UK has a policy in place to ensure that diesel and petrol are taxed at the same level. The indirect fuel subsidy per diesel car, considering their different energy content and using average values for the EU in 2014, assuming it consumes 15,000 litres of fuel over its lifetime, and including 21% average VAT, currently amounts to €2,600.

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Diesel has higher CO2 emissions per litre. There is no environmental reason for the two minimum rates to differ. In fact, diesel cars are responsible for huge air pollution problems in cities due to higher emissions of nitrogen oxide and particulate matter. Economically or environmentally speaking there are no apparent reasons why diesel and petrol should be taxed differently per unit of energy or tonne of CO2. An OECD paper44 argues that taxes for diesel should be higher than for petrol.

“Diesel emits higher levels of both carbon dioxide and harmful air pollutants per litre than gasoline.

This implies that, from an environmental perspective, the level of tax needed to reflect these environmental costs should be higher for a litre of diesel than a litre of gasoline. The other social costs are more directly linked to distance travelled than to the amount of fuel used. However, since diesel vehicles are often more fuel efficient and thus travel further on a litre of fuel, the social cost per litre of fuel is likely to be higher for diesel than for gasoline. This too implies that the level of taxation reflecting these social costs should be higher for a litre of diesel than for gasoline.” Other publications45 46 argue that Europe’s lower diesel tax has not been beneficial to the climate because of the climate effect of the additional PM and NOx emissions and the larger vehicles and additional mobility it has caused.

On top of that, we have an imbalance in Europe when it comes to refining capacity. According to FuelsEurope47 the promotion of diesel through taxation and other instruments “has led to excess gasolineproduction capacity and a corresponding shortage of diesel production in the EU”. In addition “the EU relies heavily on foreign imports. Currently, the majority of diesel and heating gasoil comes from Russia”. Closing the gap would also help EU refineries to improve Europe’s competitiveness while improving our energy security and decreasing our dependency on Russian-refined diesel.

Individual member states will have a hard time to simply increase the gap to bring diesel prices closer to petrol, because other member states won’t do it and therefore the problem of fuel tourism would become more acute. Therefore, EU action is needed.

5. The erosion of diesel taxes for trucks Trucks are buying cheaper diesel than private consumers. To an extent this has always been the case because hauliers buy diesel in bulk, securing discounts, and can reclaim VAT, lowering the net fuel price they pay. In addition, since 2000 an additional phenomenon has been on the rise – a possibility to reclaim part of the excise duty in some member states.

To quantify the amount of fuel used by trucks48 the EU Reference scenario 2013 (EC, 2013) was used, which was also the basis for the REST model49. This model was developed by CE Delft for DG ENER for calculating the contribution of renewable energy sources in transport to the RED and FQD targets. A check with OECD, 2014. The Diesel Differential. Differences in the tax treatment of gasoline and diesel for road use.

Michel Cames and Eckard Helmers, Critical evaluation of the European diesel car boom - global comparison, environmental effects and various national strategies, June 2013 L. Schipper and L. Fulton, Disappointed by Diesel? Impact of Shift to Diesels in Europe Through 2006, 2009 FuelsEurope is the voice of the European petroleum refining industry.

Ad-hoc analysis performed by CE Delft commissioned by T&E.

CE Delft, 2014. REST Model.

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In the EU Reference scenario 2013 the energy demand by trucks can be distinguished. The difference between PRIMES and TREMOVE is that TREMOVE is outdated (latest version 2010) and reports fuel consumption of vehicles registered in that country, while PRIMES proves a good match to the fuel consumption per country. PRIMES data was available for 2005, 2010 and 2015. For all years before 2005, the share of fuel consumption by trucks of 2005 was used. Other years were interpolated.

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