RESUMEN EJECUTIVO DE LA EVALUACIÓN EX POST EXTERNA DEL PROYECTO DE COOPERACIÓN TRIANGULAR ENTRE MÉXICO, PERÚ Y

5.2.1. Introduction

Taxation of energy commodities such as oil, gas, electricity, and oil products is widely practiced across the EU. Energy taxation represents an important source of revenues for Member States;

oil and gas in particular represent an important source of public revenues for national governments all over Europe due to the low price elasticity of energy commodities. Taxation is also a valuable instrument for the achievement of EU renewable energy and climate change goals. Indeed, by varying the level of taxation depending on carbon content and other criteria, the EU and Member States can create incentives and disincentives to use specific forms of energy, thus promoting energy efficiency, energy security, and decarbonisation.

The EU has set up a system of minimum rates that each Member State must charge for the final consumption of energy products and electricity. Still, Member States are relatively free to determine their own legislation for both energy production and consumption. This is one of the reasons why broad discrepancies in terms of energy taxation currently subsist at the EU level, whereby the share of taxes in final electricity and gas total prices varies from 5% in the UK to over 50% in Denmark (among the EU-27).

In April 2011, the European Commission launched the proposal for a new directive (EC 2011a) restructuring the Community framework for the taxation of energy products and electricity.

One of the objectives of the reform is to take into account both the CO2 and energy content of energy products to promote energy efficiency and decarbonisation.

Fiscal policy measures can also help smooth the impact of oil prices on energy prices. This section identifies possible taxation amendments that could mitigate the translation of high oil prices into high energy prices.

5.2.2. Energy taxation in Europe

Taxation of energy products in Europe is commonly grouped under the definition of

“environmental taxation”, even though its scope is not necessarily environmental but purely fiscal. Through environmental taxation the legislator places a tax on a product or activity that damages the environment, for instance pollution, in the attempt to recover the actual costs of economic activities.

Figure 93: Evolution of environmental taxation revenues in the EU-27 as percentage of Taxes and Social Contributions (TSC)

Source: (Stamatova and Steurer 2012)

Energy taxation can take different forms; a Value Added Tax (VAT) is based on the value consumed whereas lump sum taxation is a fixed amount that is charged to the consumer irrespective of income. On top of general taxes, the most common form of taxation at the EU level is through the application of excise duties. Excise duties are a form of indirect taxation on the final consumption of an energy product, expressed as a fixed monetary amount per quantity of the product. Over the years, environmental and energy taxes have been progressively raised in the EU. In 2010 environmental taxation (including energy transport and pollution taxes) made up 6.2% of all taxes and social contribution, almost three-quarters of which are composed of energy taxes (Stamatova and Steurer 2012).

Figure 93 shows that while the percentage contribution of environmental taxes to public revenues has decreased between 1995 and 2010 in the EU-27, the absolute amount of energy taxation has gradually increased in nominal terms.

As we can see from Figure 94 below, GDP has increased faster than energy tax revenues in relative terms, i.e. the share of energy tax revenues in GDP has decreased. According to (Stamatova and Steurer 2012), there are various reasons for this decline: long-term price increases in commodities such as oil and natural gas led to a slow but steady decrease in energy demand in the period between 2003 and 2010. The increase in oil price and economic crisis that took place in 2008 certainly exacerbated this trend. Promotion of renewable energies and the existence of other mechanisms (e.g. ETS scheme) may have eroded the tax basis and contributed to the decline in energy tax revenues relative to GDP.

Finally, given the current economic downturn governments may have preferred not to increase energy taxation further to avoid large increases in prices for end-users.

Figure 94: Energy taxes, GDP and final energy consumption, in the EU-27, (index 1995=100)

Source: (Stamatova and Steurer 2012)

In 1992, the European Community decided to start a harmonised taxation system on mineral oils through the adoption of two directives. The first one (92/81/EEC) harmonised the structure of excise duties on mineral oils, while the second focused on the approximation of the rates of excise duties on mineral oils (92/82/EEC).

Later in 2003, the EU decided to strengthen the internal market for energy products by reducing disparities between Member States and avoiding the risk of market distortions and unfair competition due to very different levels of energy taxation. For this reason, the Energy Taxation Directive (2003/96/EC) set a minimum taxation rate for energy products used as transport and heating fuels, such as oil, natural gas, coal and electricity.

The main objective of the directive was to “improve the operation of the internal market by reducing distortions of competition between mineral oils and other energy products”. The Directive received much criticism especially regarding the minimum level of taxation, which was too low to be practically effective (IREF 2010).

To amend the shortcomings of the existing directive and to align energy taxation with energy and climate change targets, the EC launched a proposal to review the current energy directive on 13 April 2011. The EC proposes “to introduce an explicit distinction between energy taxation specifically linked to CO₂ (…) and energy taxation based on the energy content of the products” (COM(2011) 169/3). The proposal sets a minimum rate of

€20 per ton of CO2 related to the use of energy products (excluding electricity), while general energy consumption components (also applicable to electricity) vary depending on whether the product is used as a motor fuel (€9.6 per GJ) or heating fuel (€0.15 per GJ).

Fiscal policy and energy prices

Most energy taxes applied (and in particular oil taxes which represent the vast majority of energy product related taxes in the EU) fall into the excise duty category. Excise duties can limit the impact of oil prices shocks, since they vary according to volume, not price.

Governments can also take advantage of this mechanism to reduce fluctuations in oil prices by keeping the rate very low when the price of oil is high and vice versa (IREF 2010).

Energy taxation may constitute 30% to 40% of the final price paid by consumers. Due to the high inelasticity of demand, taxation is an important source of public revenues across the EU. However, tax returns may fluctuate and decrease as consequence of a price increase. For example the average tax rate for oil in Europe was 40% in 1981 when the price of oil was high, while it reached 200% in 1994 when the price of oil was very low (Newbery 2005). As mentioned above, this is because the share of an excise duty is higher when the price of oil is low and lower when the oil price is high.

Increases in energy prices and in particular oil prices should not be automatically offset by a reduction in the excise duty level. Reducing the level of energy taxation can be a quick fix to protect consumers from oil price shocks, but supply and demand must be able to adjust to any permanent price increase in the medium term (Brook et al. 2004; EC 2008). To signal to consumers (whether residential, commercial, or industrial); i.e. they will not feel the price increase and thus will not adapt their behaviour. In this sense, the proposal from the European Commission could be a valuable policy instrument for policy makers in renewable energy and energy efficiency sub-charge is hidden within the component

“general service tariff”. Both examples, however, are not taxes or duties in the strict sense – although mandated by government policy, they are raised and collected by the energy supplier. The French government has also recently announced the intention to introduce a new type of green tax for the support of renewable energies.

Putting a price on the carbon content of energy products also shifts energy consumption towards less polluting resources and, in the long term, reduces oil dependency. A few examples of carbon taxation exist in Europe: Finland for instance introduced a carbon tax as early as 1990, based on both the CO2 content and the energy content. The tax is applied only to fossil fuels for transportation and heating, with natural gas having a reduced taxation rate in comparison to oil, while electricity is exempted.

The UK Climate Change Levy (CCL) in place since 2001 is probably the best-known example of a carbon tax in Europe. For non-domestic users, a rate of £5.24/MWh for electricity and £1.82/MWh for gas is applied (DECC 2013). The CCL attracted much attention and in particular opposition from industry which argued that taxing carbon would undermine UK’s industrial competitiveness. Notwithstanding the carbon levy and charges related to the decarbonisation of the economy, it is found that the UK actually has a very low tax rate in comparison with other Member States. A detailed study from (DECC 2013) attempts to assess the impact of energy and climate policies on end-user bills. In the analysis the authors include the impact of the Carbon Reduction Commitment (CRC), an energy efficiency trading scheme in place for private businesses and public authorities.

According to their estimates, the average impact of energy and climate change policies on gas and electricity prices for medium-sized industries is between 5% and 14% of total prices. Similarly, for energy intensive industries the range of impact is estimated to be between 1% and 15% of total prices.

Tobin tax types of instruments to mitigate speculation

An oil future is a contract between a buyer and a seller, where the buyer agrees to purchase oil at a fixed price in the future. The contract value will vary depending on the assumptions regarding future oil price development. The debate over the role of financialization of oil futures and whether it increases the volatility of oil price is still open.

Academic literature argues that oil futures impact the price of oil as they create an artificial market where the price of oil develops unrelated to actual changes in supply and demand.

Investors trading oil in future markets may profit from abrupt changes in the price of oil and may exacerbate important price shocks that negatively affect end user prices (Brook, A. et al. 2004). Research found that speculation has also been related to decrease in oil prices, further contributing to price volatility (Bassam et al. 2012). A solution to reduce the impact of oil speculation is to impose a small tax on all financial transactions related to oil futures. In February 2013, the European Commission launched a proposal for the implementation of a Financial Transaction Tax (FTT) on trade, stock, and bonds exchange, backed by 11 key Eurozone countries. The rates are very low, as little as 0.1% for equities and bonds and 0.01% for derivatives, but it is estimated to raise up to €50 billion a year.

Via such mechanisms speculative transactions could be reduced and therefore reduce the impact on oil prices.

5.2.3. Policy recommendations

Energy taxes can contribute to the stabilisation of energy prices. They should be set in a non-distortionary manner and designed to send the correct “long-term” price signal to consumers, so that they will adjust their behaviour when the price of an energy service increases or decreases (EEA 2011). Short-term quick fixes, such as reducing taxation levels when oil prices are high, may lead to market distortions. Sound fiscal instruments should provide appropriate incentives to promote an efficient use of energy resources and reduce oil dependency.

To minimize the impact of oil prices on energy prices, governments should therefore:

 Avoid energy tax reductions in response to oil price increases; if needed, short-term