Green fuels to get boost from EU tax revamp: draft

BRUSSELS Mon Mar 14, 2011 12:57pm GMT

BRUSSELS (Reuters) - The greenest fuels would become cheaper under an planned overhaul of European fuel taxes that would also narrow the price gap between petrol and diesel.

The European Union's executive wants to overhaul Europe's 240 billion euro ($334.4 billion) annual taxation of energy, which varies widely between countries and often creates paradoxical incentives that encourage the biggest polluters.

The EU's commissioners aim to debate the plan before the summer break. They had already discussed it last June and put in on hold while taxation commissioner Algirdas Semeta smoothed out a number of issues.

Over the next decade, the European Union plans to cut by a fifth its emissions of carbon dioxide, the gas most blamed for climate change.

Those EU climate goals are undermined by a system that makes the lowest tax demands on the biggest source of pollution, coal, and puts the highest burden on one of the least carbon-intensive, bioethanol.

Semeta plans to change all that by proposing a new two-part fuel tax -- split into a carbon tax of 20 euros per tonne of CO2 and a minimum energy tax on motor fuels and heating fuels, according to a draft document seen by Reuters.

The carbon tax would not be an added burden, rather the existing tax would be split into two components: energy and carbon.

Energy taxes on coal, the most polluting form of energy used in Europe, would rise five-fold to 0.15 euros per gigajoule of energy, but the increase might be phased in.

Companies already buying permits for carbon emissions from the EU's Emissions Trading Scheme, its main tool against greenhouse gases, would be given exemptions. So too would many households.

Fuels made from plant biomass -- such as wood pellets, bioethanol or biodiesel -- would pay a reduced energy tax and be exempted from the carbon tax, because in some cases they can absorb almost as much carbon when they are grown as is released when they are burned.

The benefits would be aimed at the most sustainable biofuels, rather than the more controversial ones that place a disproportionate burden on land and compete for food grains.

CARBON LEAKAGE

If approved by EU leaders, the new rules would be phased in between 2013 and 2020.

Semeta's attempt to overhaul fuel taxes last summer stalled over his colleagues' concerns about the impact on industry.

The new draft, however, includes added protections for any companies facing tough competition from overseas rivals, which benefit from lower costs because they can pollute for free -- so-called 'carbon leakage'.

There are also provisions to help some households cope with the cost of heating their homes. And France and Spain gain added flexibility to give some financial autonomy to regions that are breaking away from central government, Catalunya for example.

But a decade of low taxes on fuel for farming, aquaculture and forestry could be put under review.

European countries have traditionally put up stiff resistance to interference from Brussels on tax matters.

But a window of opportunity has emerged for a tax overhaul because it could help governments such as Italy, Greece and Spain to cut deficits urgently and reduce public debts, without raising unpopular income taxes.

Taxing consumption, rather than earnings, is seen by many as a good strategy for boosting economic growth.

Carbon taxation is already used by Denmark, Sweden and Ireland, while Britain, Germany and the Netherlands have various eco-taxes.

Under Semeta's proposal, taxes for heating fuels such as gasoline, heavy fuel oil, natural gas and coal would all have a minimum level of 0.15 euros per gigajoule in 2013 -- level with the current lowest tax rate for energy.

Petrol taxes would remain level at 9.6 euros per gigajoule from Jan 2013, and diesel taxation would gradual be brought into line with that.

(Reporting by Pete Harrison, editing by Jane Baird)