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REGULATORY ASSISTANCE PROJECT THE PERFECT FIT | 29 4.1.2 Revision of the Energy Taxation Directive What are the current EU proposals? Previous analysis by RAP has proposed the reform of the tax system so that it effectively supports carbon pricing.33 The current Energy Taxation Directive (ETD) exists to ensure minimum tax levels across Member States on electricity and fuels when they are used for motor fuel, aviation or heating, in order to avoid competitive distortions and contribute to a low-carbon and energy- efficient economy. The ETD, however, does not contribute to heat decarbonisation, as the minimum rates are low and relate to neither energy nor carbon content. Furthermore, Member States are free to increase any energy tax above the minimum levels prescribed by the ETD. In practice, many Member States have set tax rates, levies and surcharges in a way that effectively subsidizes fossil fuels by disproportionately burdening electricity consumption relative to other energy products, leaving taxes for fossil heating fuels at a relatively low rate. The current proposals for revision of the ETD34 aim to ensure that the energy content and environmental impact of fuels is reflected in taxation. The proposals would complement the ETS extension to heating and transport. Transitional rates on certain fuels and for certain groups (e.g. low income) would mean some tax increases come in from 2023 and higher rates would be reached by 2033. Under the proposals, electricity would always have the lowest rate, regardless of its use. Fossil fuels and unsustainable biomass would both have higher rates owing to the associated environmental damages, albeit not at sufficient levels to correct existing imbalances. A proposed ranking rule would ensure that in each Member State, where energy tax levels are above the minimum, the ranking of fuels by environmental performance would be reflected in their respective tax rates.35 How would these proposals affect heat pumps? Given the low minimum taxation levels proposed for fossil heating fuels and the possible exemptions, the likely effect of the Commission’s ETD proposal on heat pump deployment could be limited compared to what can be achieved through stricter regulations and the ETS 2. Nonetheless, the changes could help to play a role in effectively rebalancing energy costs in favour of electricity use, shifting the economics of heating away from fossil fuels and biomass towards heat pumps. Twelve Member States, predominantly in Eastern Europe, would need to raise their taxation levels on fossil gas to the new minimum rate, while eight Member States would need to reduce their taxes on electricity (or raise taxes on heating fuels) in order to comply with the ranking rule. 33 Thomas, S., Sunderland, L. & Santini, M. (2021). Pricing is just the icing: The role of carbon pricing in a comprehensive policy framework to decarbonise the EU buildings sector. Regulatory Assistance Project. https://www.raponline.org/knowledge-center/pricing-just-icing-role-carbon-pricing-comprehensive-policy- framework-decarbonise-eu-buildings-sector/ 34 European Commission. (2021b). Proposal for a Council Directive restructuring the Union framework for the taxation of energy products and electricity (recast). https://ec.europa.eu/info/sites/default/files/revision_of_the_energy_tax_directive_0.pdf 35 Gore, T. (2021). The revision of the Energy Taxation Directive could underpin a fair and green tax reform in Europe. Heinrich Boll Stiftung https://eu.boell.org/ en/2021/09/13/revision-energy-taxation-directive-could-underpin-fair-and-green-tax-reform-europePDF Image | RAP Perfect Fit Heat Pump
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