Thursday, 14 April 2011

When tax policy and climate change collide

Generally, there are few areas in which the fiercely eurosceptic English public thinks EU regulation serves a useful purpose. One of those areas has traditionally been climate change. Even the Conservatives, the most anti-EU of the three main British parties, have highlighted the constructive role EU legislation can play in Europe's efforts to fight climate change. The EU is good as a free trade block and as a way of pooling efforts on climate change, they say, but it should stay out of areas best dealt with by member states such as taxation, finance, immigration, health and safety, transport and human rights.

The problem is it isn't that simple. Efforts to combat climate change in a coordinated pan-European way must by definition spread into many sectors, including all of those mentioned above. This conundrum was evident yesterday when the European Commission presented its plans to revise the EU energy taxation directive in a way that would change fuel taxes to make them more in line with climate change goals.

Saying the existing EU rules dating from 2003 are "outdated and inconsistent", the commission has proposed setting a minimum rate at which member states can charge fuel tax based on the carbon dioxide emitted and the energy produced rather than on the volume of the fuel. This would end the situation where renewable fuels are taxed the same as fossil fuels and some of the least energy-efficient fuels are taxed less than more energy-efficient ones. Fuel taxes have actually decreased by 10 cents per litre since 1999.

But taxation is a tricky area of EU policy. Traditionally, it's supposed to be an area entirely left to member states - and the EU does not directly tax citizens. But the EU can set minimum standards of taxation in order to have a relatively harmonised system across the common market, as it does for VAT (sales tax). In 2003 it did so for energy taxation, but only with the goal of harmonisation rather than for encouraging clean fuel use. Since then fuelmakers and green groups have complained that the rules benefit certain types of fuels over others. For instance, diesel is far cheaper to use in continental Europe because it is taxed less. But according to the most recent studies it has a higher energy and CO2 content.

British blockade

So one can assume that any government that has been outspoken in its concern over climate change, as the British conservatives have, would welcome an effort to make fuel taxation fairer in order to encourage the development of clean fuels, right? Well, not exactly. The instinctive reaction from the British government to yesterday's proposal was an immediate 'hell no'. The UK treasury department told news outlets that taxation is a matter for member states, and each country should be able to decide for itself how to meet their emissions reduction targets.

Of course this isn't a question of the EU inventing new taxation powers for itself, because Brussels already sets minimum fuel tax rates. The commission has said these existing rates appear to be setting a perverse incentive to pollute, or at the very least creating a difficult environment for renewable fuels to enter the market. So they have proposed to fix the situation. The UK government's instinctive response of always saying no to any EU proposal involving taxation seems strange considering this is an area of taxation the EU is already involved in.

What's more, the changes appear to largely be in the UK's economic interest because Britain has some of the highest fuel taxes in the EU. This revision would end the advantage currently enjoyed by 'fuel tax havens' like Luxembourg that profit from lorries avoiding filling up in the UK and instead filling up in countries where fuel is cheaper.

German chancellor Angela Merkel has also expressed reticence about the proposal, but mostly because it would result in such a drastic change to petrol taxation rates in her country. Diesel in Germany is heavily subsidised, and under this proposal taxation on that fuel would increase tenfold by 2020. But this is a specific objection that will result in negotiation. No member state has expressed the kind of ideological opposition to the proposal that the UK has.

Because any taxation proposal requires the unanimous approval of all member states, it looks like these measures to green Europe's fuel taxation may never see the light of day – at least in their current form. The British government hasn't specified what exactly would need to be changed in order for this proposal to get its support. So far they seem to have indicated that the current government will vote against any proposal involving taxation, even if that proposal is just making changes to existing EU taxation policy.And it only takes one no vote to bury the proposal.

This isn't the first time that the current British government's stated concern over climate change and its inherent euroscepticism have appeared to collide. Two weeks ago, when the commission came out with a 40-year green transport plan that set a goal of eliminating the use of petrol-fueled combustion engines in cities by 2050, the government's instinctive response was to decry any Brussels attempt to get involved with the transport decisions of municipalities. The conversation in the UK became centred around the EU's right to get involved in municipal transport decisions, rather than about the feasibility of the idea proposed. This despite the fact that it was just a theoretical goal presented in a policy paper, not an actual piece of legislation.

The UK is also likely to resist an upcoming proposal from the commission to take action on taxation policies for company cars. Studies show that the tax breaks being given by governments to free cars given out by companies to their employees are making people drive far more often than they otherwise would, any proposal with the word 'taxation' in it is likely to get an automatic 'no' from the UK.

The current UK government of David Cameron may indeed care deeply about climate change. But so far it appears that its deep distrust of the EU outweighs its concern over the climate.

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