New effort to break deadlock on CO2 tax

Date: 19/10/1995

By Tim Jones

SPANISH efforts to break a five-month deadlock over whether the EU should promise to introduce a common tax on carbon energy have already been attacked from both sides.

Spain's Finance Minister Pedro Solbes will suggest to his EU counterparts on Monday (23 October) that they should commit themselves to introducing a harmonised tax around the turn of the century to compensate for the vagueness of the planned transitional regime.

But member states which had lined up squarely behind the European Commission in its attempt to salvage elements of its 1992 proposal for a joint tax on carbon use are worried that the new presidency compromise does not go far enough.

At the same time those countries that killed the first proposal insist they cannot agree to any moves towards a common energy tax.

“We are not going to sign up to a harmonised tax now or in the future,” a UK official said, echoing the sentiments of the Greek, Portuguese and Irish governments.

When they meet in Luxembourg next week, EU finance ministers will be asked to find a compromise on the key issue of whether the Union should commit itself in any way to introducing a harmonised tax on energy by the end of the century.

Just agreeing this much could well be enough to win over some of the tax enthusiasts - the Dutch, Danes, Belgians, Italians and Finns - but still not go far enough to convince the Swedes, Germans and Austrians.

Agreement looks as far away as ever three years after the Commission first came forward with a proposal to use fiscal measures to stabilise carbon emissions at 1990 levels in the year 2000.

The proposal was delayed in the Council and finally abandoned at the Essen summit in December 1994, when the Commission was asked to go away and “draft guidelines allowing member states, who want to, to apply a CO2/energy tax on the basis of common parameters”.

Those opposing the tax considered this a great victory, but the Commission's revamped proposal in May this year tried hard to cling on to the wreckage. While member states were to be allowed flexibility in determining how soon they applied tax rates on different products, this would simply be for a transitional period.

According to the proposal, one year before the end of this transition in 2000, the Commission would present a report on how well the temporary system has worked “accompanied with proposals for the transition to a regime of harmonised taxation”. But months of negotiations in working groups have made the proposal even more flexible.

“Now there are some countries which were initially in favour of the proposal who are not so keen to follow it because they feel it means nothing,” said a spokesman for the European Petroleum Federation.

The presidency draft, for example, would allow countries to apply a zero rate of tax to several of the products specified in the proposal.

Yet the disaffected pro-tax countries could be bought. “Some member states that are enthusiastic about a carbon energy tax will go along with this as long as there is a clear commitment some time in the future to a harmonised tax,” says a working group member.

A crunch meeting of the group on 11 October to prepare for next week's Ecofin meeting saw member states divided into four camps.

The first group - comprising the Netherlands, Denmark, Belgium, Italy, Finland and Luxembourg - feel that having accepted the dilution of the Commission's proposals, they deserve a commitment that it will lead to a harmonised tax by the year 2000.

The second group - numbering the UK, Greece, Portugal and Ireland - see no need to commit the EU to harmonised taxes. Any system set up now should be reviewed at some point in the future and the Commission has the right of initiative at any time to draft proposals.

The third group - led by Sweden and supported by Germany and Austria - want a clause inserted that failure to take a decision on harmonised taxes by 2000 would automatically trigger mandatory rates of tax on a variety of products.

Finally, and standing alone for the moment, is France. Paris opposed the original proposal and the second as well as focusing taxes on the carbon content of fuel.

Instead, the French government would support a proposal to raise the minimum duty rates on oils and would consider extending excise duties to gas, coal, peat and coke in line with the harmonisation of these rates under single market legislation.

“We're back to square one,” one diplomat said.

Finance ministers can be expected to restate their positions and the Spanish presidency will ask the working group to carry on its work and attempt to come up with a suggested compromise for the meeting of finance ministers in December.