A step in the right direction – but only on diesel tax

According to the draft revision of the energy tax directive, by 2018 the minimum tax rate for diesel would go up by about 25%, from 33 to 41 cents per litre, and so would tax rates for LPG and CNG. By 2023, every member state would have to tax the energy content and CO2 emissions of all motor fuels – petrol, diesel, LPG, CNG, and biofuels – in the same way, except that ‘sustainable’ biofuels would be exempt from the roughly five-cents-a-litre CO2 tax. That’s in a nutshell what it means for transport.

In general, this is a good approach. Diesel has been subsidised for too long. Car makers have gone out of their way to argue that diesel cars are more efficient and that therefore a diesel tax break is justified. But the diesel subsidy makes driving SUVs affordable, and makes long-distance driving competitive with rail. If diesel cars are indeed so much more fuel-efficient, they should easily survive under a fuel-neutral tax regime. The British experience shows this is not theory: despite equal tax on a litre of diesel and petrol, and a diesel penalty in the company car tax system, UK diesel car sales are at the EU average. And even if Europe got less addicted to diesel cars as a result of changed taxation, car makers would have to step up innovation in petrol engines which arguably offers them much better chances on the global marketplace.

So the Commission is committed to rationalising taxation of road transport fuel. How strange then that this same Commission is completely irrational when it comes to aviation and maritime transport. Not only is there no tax on aviation and shipping fuel, the current legislation even prohibits such taxation. Such a ban is completely unnecessary and counterproductive. The Commission is missing this once-in-a-decade opportunity to at least end the ban on fuel taxation in these sectors, but apparently even that demand was too much, without any credible justification.

It’s worrying that the Commission’s transport directorate is one of the strongest opponents of ending the ban. This is the same directorate that has put out a white paper saying transport emissions need to be slashed by 60% by 2050 and that oil dependence is such a worry for the Union. The lack of strong political coordination in the Commission is ever more worrying – the 27 directorates have some nice ingredients, but seem as far away as ever from delivering a tasty meal.

But that’s the past – let’s look at the future. Now it’s up to the 27 finance ministers. There have been rather predictable outcries from the UK (‘EU should stay out of taxation’) and Germany (‘EU should not punish our car makers’). In reality, these are probably the two member states that stand to gain most from the proposal. The UK would hardly have to do anything itself and would benefit if other member states’ diesel taxes came closer to its
own, relatively high, level. Germany has two low-tax neighbours, Poland and Luxembourg, and hence loses billions of revenues from hauliers filling up there instead of in Germany. And to top it all off, German taxpayers would also be happy if, say, Portugal could raise diesel taxes, which is currently difficult because Spain keeps them at the minimum.

So let’s see – it’s not going to be easy but my hunch is it’s not ‘game over’ either. There has been a lot of talk about the need for closer economic coordination in the EU. Now is the time to walk that talk.