Brussels have already started the process of harmonisation of Energy Taxes. The Council Directive 2003/96/EC restructuring the Community framework for the taxation of energy products and electricity have been governing several aspects of energy taxation (the Energy Taxation Directive). It lays down common rules on what should be taxed and sets out minimum tax levels for products used in heating, electricity and motor fuels, which EU Member States are required to levy although they are allowed to set their own national rates above these minimum rates. Presently, minimum rates are based on the volume of energy consumed. However, the Commission has been trying, for a long time, to introduce minimum levels of taxation on different types of fuels related to the intensity of their emissions. The Commission wants to calculated taxation according to carbon dioxide (CO2) emissions and energy content. Due to some member states resistance, particularly the UK, Brussels was not able to introduce yet a minimum carbon tax.

Despite the opposition of some member states the European Commission has proposed a EU-wide minimum tax on carbon. On 13 April, the European Commission put forward a proposal to review the Directive on energy taxation. The proposal is subject to the special legislative procedure, hence the European Parliament would be merely consulted. The Commission is expecting that the revised Directive will enter into force in 2013. Member States would be obliged to levy a CO2 tax on fuels in order to cut emissions if such proposal is adopted. However, Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania and Slovakia would benefit from an extended transitional period, hence they would have till January 2021 to introduce CO 2-related taxation, and not January 2013 as the other Member States.

Under Article 113 TFEU, the Council may adopt “provisions for the harmonisation of legislation concerning excise duties” but only if such “harmonisation is necessary to ensure the establishment and the functioning of the internal market.” However, there is no evidence that the single market would be distorted. Such proposal breaches, therefore, the principle of subsidiarity. Member states must keep their right to set their own taxation regimes. Taxation is member states competence and Brussels should not be involved in it. Under the Commission’s proposal, Member States would be required to redesign their national tax energy legislation.

Presently, Sweden, Denmark, Finland and Ireland apply a carbon tax, and some other member states are planning to introduce it. The Scandinavian countries support the Commission’s proposal whilst Germany and Poland are concerned that their coal and steel industries would be disproportionately affected by the proposed tax. The Commission’s proposal is also facing opposition from the UK. It is important to recall that taxation is one of the very few areas where unanimity is required, under the Lisbon Treaty. Hence, unanimity is required at the Council for the proposal to be adopted, consequently, the UK government can, in fact, veto it.

If the proposal is adopted, Member States would be required to impose taxation on energy products and electricity in accordance with the draft Directive. As abovementioned, presently energy taxes are based on volume, under the Commission’s proposal energy taxes on fuel consumption would be calculated taking into account energy-intensity. The Commission’s proposal introduced a distinction between energy taxation specifically linked to CO2- emissions attributable to the consumption of the products concerned (CO2-related taxation) and energy taxation based on the energy content of the products (general energy consumption taxation).

The minimum tax rate, set at EU level, would be divided into two parts. The Commission has proposed a minimum rate for CO2 emissions of €20 per tonne of CO2 emitted by sectors not covered by the EU ETS. Member States would be, therefore, obliged to introduce minimum rates of CO2 taxes at €20 per tonne for fuel for transports and heating. The UK government must veto such proposal, otherwise UK taxpayers will face another tax.

Moreover, the Commission proposed new minimum tax rates based on energy content of a fuel. Under the Commission’s proposal “General energy consumption taxation would be calculated in EUR/GJ on the basis of net calorific value of the energy products and electricity.” The Commission has proposed different minimum tax rates for motor fuels and for heating fuels. As regards petrol, the minimum tax rate would be fixed at €9.6/GJ and will be applicable from January 2013. The Commission proposed various rates per GJ for gas oil (8.2€/GJ from 2013 and 8.8€/GJ from 2015), kerosene (8.6€/GJ from 2013 and 9.2€/GJ from 2015), LPG (1.5€/GJ from 2013 and 5.5€/GJ from 2015) and Natural Gas (1.5€/GJ from 2013 and 5.5€/GJ from 2015) but the aim is to apply the same rate, €9.6 per GJ, by January 2018. The minimum levels of taxation, which would be applicable from January 2013, to motor fuels used for agriculture purposes and machinery used in construction have been set, by the Commission, at €0.15/GJ. The Commission also proposed €0.15/GJ for heating fuels, which would be applicable from 2013.

Hence, the overall rate at which a product would be taxed, would be a combination of both CO2 and energy content elements. The Commission has specified that the minimum rates would be linked to inflation and to the development of the CO2 price. Member States would be allowed to introduce their own rates but just above the EU minima. Nevertheless, the Commission has specified, “the same rates and structure must then be applied to all fuels used for the same purpose (motor fuels or other fuels).” The current Article 5 of the Energy Taxation Directive reads “Provided that they respect the minimum levels of taxation prescribed by this Directive and that they are compatible with Community law, differentiated rates of taxation may be applied by Member States, under fiscal control…” in certain cases. However, the Commission proposes to amend this provision “in order to ensure the consistency of the CO2 price signal," hence, "the possibility for Member States to differentiate national rates should be restricted to general energy consumption taxation.

It seems that Member States would be allowed to continue to apply exemptions or reductions to the benefit of households and charitable organizations. But, the Commission also proposed to limit Member States’s total or partial exemptions or reductions as regards general energy consumption taxation. Under the Commission proposal member states would no longer be allowed to apply lower minimum levels of general energy consumption or exemptions to natural gas and liquefied petroleum gas. The Commission has proposed longer transitional periods for the alignment of tax rates for these products. Hence, Member States would be required to gradually increase taxation rates for these products between January 2018 and January 2023.

Moreover, Member States would no longer be allowed to apply a level of taxation down to zero to energy products and electricity used in agricultural, horticultural or piscicultural works, and in forestry as provided in the current directive. As regards CO2 related taxation, member states may apply exemptions but solely in order to avoid a risk of carbon leakage. Member States would be allowed to apply more favourable tax treatment if this can be justified by environmental reasons. The Commission also proposed to abolish the existing difference between business and non-business use of the energy products used for heating and of electricity. Member States would no longer be able to apply a lower level of taxation to commercial use of gas oil as motor fuel.

The minimum level of taxation applicable to gas oil would also be abolished so that it and petrol are taxed at the same level. Gas oil is presently taxed at a lower rate per litre than petrol in all EU Member State, except in the UK. Consequently, diesel prices would rise in many member states. Germany has seriously invested in diesel engines and it has already raise concerns over the proposal. According to Jacqueline Foster, the Conservative transport spokesperson in the European Parliament, pointed out "With so many goods transported by road, further increases in fuel costs will send inflation soaring. The knock-on effects for our economy could be significant.” Moreover, she stressed, “The UK government is right to suggest it will use its veto on these measures."