Dim prospects for EU energy tax reform

Drivers in the UK and Sweden are the hardest hit, facing prices at the pump that are 25 percent higher than in Luxembourg. Even so, despite offering the cheapest fuel in Europe, at €1.33 per litre, petrol in Luxembourg is around 40 percent more expensive than in the US.

In 2011, EU taxation commissioner Algirdas Semeta tabled plans to re-write the EU's energy taxation directive. The existing rules, agreed by member states in 2003, involve minimum tax thresholds for petrol and diesel, calculated on a "volume" basis which the commission says is now outdated.

In its place, the EU executive planned to split the tax into two components based on CO2 emissions and a given fuel's energy content.

The new proposal sets the minimum rate for taxation of the CO2 component at €20 per tonne of CO2 for all uses of the energy products. Together they would determine the overall tax rate with firms covered by the EU's Emissions Trading Scheme (ETS) getting an exemption from the CO2 component.

The obvious target of the bill is diesel, which has long enjoyed a tax advantage over petrol, but is a high carbon pollutant. It is also a contributing factor to the EU's reliance on imported oil, since the bloc's oil refineries cannot produce enough of it.

But while minimum taxes on diesel would rise under the plans, environmental groups complain that it would not necessarily lead to higher prices at the pump.

Germany leads a handful of member states where diesel taxes are already above the new minimum threshold of €412 euros per 1,000 litres proposed by the commission.

The political logic behind the commission's proposal is based on the concept of "fuel neutrality," or, eliminating tax advantages for motor fuels.

The commission proposal would also hit natural gas and liquified petroleum gas with the same excise rates as petrol and diesel - a strange move at a time when the EU executive is trying to encourage wider use of cleaner alternatives to petrol.

In fact, alternative fuels could end up losing the most.

The tax rates for natural gas would go up four times, as would excise on liquified petroleum gas (LPG), potentially making it harder for products, which only hold a small market share, to remain competitive.

“LPG does not enjoy or need a zero tax rate in most EU countries...however, bringing all fuels to the same level would ensure consumers drive only on petrol and diesel for the foreseeable future,” says Samuel Maubanc, General Manager of AEGPL, an industry lobby group.

At the same time, governments insist that they have the flexibility to decide on the tax level.

National attitudes differ greatly. Research by the Organisation for Economic Co-operation and Development, a Paris-based think tank, found that energy tax rates in Denmark, Ireland, and Sweden are among the world's highest.

In contrast, due to its low tax rate for diesel, Luxembourg is well known for its "tank tourism," with the duchy serving as a popular pit-stop for motorists, particularly lorries carrying freight, or EU staff driving back and forth from Brussels to the European Parliament's other home in Strasbourg.

Since then, successive EU presidencies have tried and failed to broker agreement among governments.

However, with unanimous support required to revamp the legislation, and such a diverse the chances of a deal are small.

For their part, MEPs gave an emphatic thumbs down to the plans, saying that they could not support increasing fuel costs during a time of austerity and recession.

But political deadlock on energy tax is not specific to the EU.

"There's no such thing as a free market in energy," says Todd Foley, the vice-president of Acore, a lobby group for the US renewable energy sector.

He told this website that different energy sectors in the US have had between 90 and 100 years of subsidy.

In America it is "very difficult to reform the tax code for energy," he noted.

Tax incentives which were originally introduced to diversify fuel production, then to curb climate change, and to increase air quality, all carry political support.

As long as member states have widely differing priorities when it comes to energy tax, the 10-year-old directive is unlikely to be changed.

As a result, the energy tax landscape within the EU is likely to remain uneven and complex. Bad news for policy makers, and bad news for the industry. Spare a thought for motorists, too.