Eco-tax proves to be elusive quarry

Date: 18/02/1999

By Tim Jones

A RECENTLY unearthed speech by Yannis Paleokrassas, addressing a Hamburg audience on "the chances for introduction of an energy tax under the German presidency", makes chilling reading.

The former Environment Commissioner was brimful of hope that Bonn would be able to end "negative and defeatist" debate and clinch a deal.

Five years and one German presidency of the EU later, the Union is seemingly no nearer to the ecological tax sought in the wake of the ground-breaking 'Earth Summit' in Rio in 1992.

Worse still for the proponents of a pan-EU tax on energy use, the original European Commission proposal bears as much resemblance to the latest compromise as a young Gouda does to a slab of Emmenthal.

Times were different in 1992. The US had a new Democratic president and a well-known environmentalist in Vice-President Al Gore, both of them fighting tooth and nail to ram a €70-billion tax on energy consumption through Congress. The Commission's plan for a levy on the use of all non-renewable energy sources - oil, coal and gas - up to the equivalent to €9 per barrel of oil, did not seem so unrealistic at the time.

The Commission and its critical but unconditional supporters in the environmentalist movement fought for the tax plan as an integral part of the EU's strategy for stabilising carbon dioxide (CO2) emissions through three presidencies.

Very quietly, realising that the plan as it stood had no chance of success in the face of implacable Spanish, Portuguese, British, Irish and Greek opposition, German Chancellor Helmut Kohl killed it off at the December 1994 summit in Essen.

A summit communiqué dominated by transport infrastructure and job-creation issues urged the Commission to go back to the drawing board and draft "guidelines allowing member states, who want to, to apply a CO2/energy tax on the basis of common parameters".

The anti-tax forces were ecstatic, but not for long. Five months later, the Commission came forward with the 1992 proposal in disguise, attempting to salvage as much as possible from the original plan.

On paper, the new proposal seemed to give reluctant member states the flexibility they desired to decide how soon they would impose taxes on various energy products. However, this flexibility would only have lasted until 2000, at which time the Commission would come up with "proposals for the transition to a regime of harmonised taxation".

Madrid and London were furious at what they saw as a ploy to get an energy tax in through the back door. Spanish fury had to be quickly tempered when Felipe González assumed the presidency of the EU in the second half of 1996 and was forced to look for compromises.

This was the beginning of the Emmenthalisation of the energy tax plan. Spain's compromise proposal, which would have allowed countries to set zero-rated tax on several products, had the effect of alienating nearly everyone.

While the Netherlands, Denmark, Belgium, Finland and Italy were prepared to sign up to the compromise because it contained a commitment to a common tax after 2000, the zealots - Sweden, Germany and Austria - could not. In the blue corner, the UK, Greece, Portugal and Ireland would not consider penning a commitment to a common tax at any time and neither would Spain, had it not been in the presidency chair.

On the sidelines, and taking a radically different approach altogether, were the French. It was France's idea that the Commission should use the existing framework of harmonised excise duties on mineral oils, tobacco and alcohol and extend them to gas and coal which won through.

In early 1997, the Commission put together 'energy tax IIIa', which called for an uprating of existing minimum rates of excise duty on mineral oils and their extension to coal, natural gas and electricity. Foreseeing the outcry which a tax on electricity consumption would cause, Internal Market Commissioner Mario Monti said governments could allow firms burning "environmentally preferable" fuels to claim a rebate on their tax.

For the anti-taxers, the new plan was infinitely preferable to the 1992 proposal, but the line-up of member states remained unchanged. On one side stood the Anglo-Spanish bloc and on the other, the German-Benelux-Nordic triangle. Deadlock loomed.

The change, when it came, was sudden and radical enough to kick-start negotiations. The UK's position was already, as diplomats say, 'evolving'. A Labour government had replaced the tax-sceptical Conservatives and had commissioned a task force of industrialists to devise a business energy-tax scheme for the UK. A marker had been laid. Spain's key ally was slipping away.

Monti decided to capitalise on the new mood in London and, under a British presidency, devised 'energy tax IIIb'. This offered member states two options. They could either agree a framework directive for taxing energy products and set positive minimum excise duties on electricity, gas and coal with long transitional periods to adjust; or they could hike existing excise duties on road fuels but allow member states to set a zero rate for coal, gas and electricity.

For the Commission, the attractions of this approach were obvious. The previous plan had reached the end of the road. Monti had to choose between abandoning the whole idea or getting agreement on an empty shell which could be filled up much later when the political will was there. 'Energy tax IIIb' fulfilled the shell role.

The British were tempted, especially once the government's task force reported back to the treasury in October that an eco-tax on business was justified. But there was still an outstanding obstacle: taxing domestic fuel.

A key pledge of the Labour Party in its 1997 election campaign was a 3% cut in value added tax on household fuel consumption. Taxing home fuel, especially via Brussels, would be political suicide.

When they assumed the presidency in July last year, the Austrians - themselves very keen supporters of energy taxation - looked for a way out of the home fuel problem. Vienna's offer of a time-limited exemption pleased the British, but not quite enough. It was total exemption or bust.

The Austrians also ran into a Spanish roadblock when they took the latest plan, with all its shortcomings, to EU finance ministers in December. While London had questioned elements of the proposal, Madrid suddenly revealed deep scepticism about its very foundations.

Finance State Secretary Juan Costa insisted that the conclusions of the meeting must reflect Spain's view that the tax would do little to protect the environment, would add to industry's costs and could stoke up inflation.

Monti was crestfallen. "We have a member state toughening its position while others are beginning to converge," he said. "We are still a long way from a solution."

The incentives for the new Socialist-Green government in Germany to make real progress on this issue under its presidency are obvious. The coalition has just agreed highly controversial taxes of its own at home. Levies on diesel and petrol are due to rise by three euro cents per litre and, from April, electricity will be taxed at one cent per kilowatt hour.

The exemptions awarded to 27 energy-intensive branches of industry are under investigation by the Commission as possible illegal state aids and agreeing an equivalent EU-wide deal would help Bonn win its case.

Diplomats are convinced that a deal, if and when it comes, will not be struck before the Helsinki summit in December and probably not even then.

The one thing they all agree is that an 'energy tax IV' would be so full of holes that it would collapse.

Article forms part of a European Voice survey on taxation, p13-20.