Explainer: The EU plan to reform energy tax

BRUSSELS (Reuters) - Progress on transport fuel tax changes to encourage energy efficiency and the use of greener sources is a priority of the Danish European Union presidency, which will be leading the bloc's discussions for the first half of this year.

The reforms are being discussed at working party level and are expected to be debated by finance ministers in March, with a view to a possible political agreement before the end of the Danish presidency, a Commission spokeswoman said.

The aim is to update existing law to reflect greater environmental ambition and stop taxing carbon-intensive coal less than much more environmentally-friendly fuel sources.

Another effect would be to make diesel prices rise in the majority of EU member states and cease being cheaper than gasoline.

Eventually, a litre of diesel would be subject to 10 per cent more tax than a litre of gasoline, but that would only be after a 10-year transition period to give business time to adapt.

Tax changes are difficult because they can only be passed on the basis of unanimous agreement across all 27 EU member states.

Discussions on revising the law have been going on since the present directive was introduced in 2003.

Then, as now, the holder of the EU presidency was Denmark, which has a strong commitment to making EU policy greener.

"Negotiations are extremely cumbersome," said Magnus Nilsson, a senior campaigner at environmental non-government organisation T&E.

"Denmark managed to bring in the existing law and if any government can make progress, it's Denmark."

WHAT ARE THE COMMISSION'S AIMS?

The directive does not seek to tax one fuel at the expense of any other, EU officials say, but to be technically neutral and create a level playing field.

Presented in 2011, with the aim of beginning enforcement from 2013, the proposed changes seek to take account of the carbon emissions as well as the energy content of a fuel.

They would complement the EU Emissions Trading Scheme, which sets limits for the amount of carbon heavy industry and the power sector can emit. It would apply a carbon tax to the transport sector and domestic heating fuel currently outside the scope of the ETS.

The reforms also fall in the context of the Commission's aim to reduce carbon emissions from transport fuels by 6 per cent by 2020 as part of wider goals to cut carbon emissions and improve efficiency.

Changes to ensure energy tax accurately reflects how much energy a fuel source generates would automatically reward efficiency, Commission officials say.

WINNERS AND LOSERS?

At present, only Britain imposes exactly the same level of tax on diesel as on petrol. Other EU states tax diesel either less or much less.

Some smaller countries have used the existing regime to boost tax revenue by lowering their diesel taxes, encouraging lorries carrying freight across Europe to fill up at their fuel stations, rather than in neighbouring countries.

In western Europe, Luxembourg has one of the lowest levels of diesel tax, an attraction for long-distance lorry operators.

One consequence is that Luxembourg is among three EU states that are falling short of Kyoto targets to cut carbon emissions (the other two are Italy and Austria), but its higher tax revenues more than compensate for costs arising from buying carbon allocations to offset its emissions, analysts say.

Prices at the pump are not the only consideration when choosing a vehicle. Other sales taxes come into play and some analysts say the proposed changes might slow diesel growth, but might not cut its use significantly.

HOW DOES IT WORK?

For now, energy is taxed on the basis of volume, which the Commission says creates unfair competition between fuel sources and unjustifiable tax benefits for some fuels.

Renewables are taxed at the same rate as the energy sources they are meant to replace – so biodiesel is taxed at the same rate as diesel, for instance. Under the new regime, biofuels would be taxed less than their fossil fuel equivalents.

The new law proposes splitting the minimum tax rate into two parts. One would be based on the CO2 emissions of the energy product and would be fixed at €20 per tonne of CO2.

The other would be based on energy content: on the actual energy a product generates measured in gigajoules. The minimum tax rate would be fixed at €9.6 per gigajoule for motor fuels, and €0.15 per gigajoule for heating fuels.

Since a litre of diesel contains more energy and carbon than a litre of gasoline, minimum tax rates per litre for diesel would eventually be higher for diesel than for petrol.

HOW STRONG IS THE OPPOSITION TO/SUPPORT FOR THE PROPOSAL?

The plans have drawn support from the refining industry, while the Organization of the Petroleum Exporting Countries (OPEC) said in a report last year they could provide a fillip for European refineries, which have come under strain from poor profit margins.

Environmental groups also welcome the proposals. They argue cheaper diesel helps to make people choose heavier and therefore less fuel-efficient cars and that the existing system penalises governments seeking to use tax to reduce CO2 emissions.

In contrast, representatives of the German car industry, which has invested heavily in diesel engine technology, have been among the critics of the reforms.

Britain could benefit from the changes as long-distance diesel drivers enter and leave Britain without refuelling under the current regime. But even Britain would be expected to be opposed in principle because it does not believe the EU should have jurisdiction over its taxation.