Abstract
This article compares effective tax rates, in energy and carbon terms, on the full spectrum of energy use in 21 European Union countries and across all OECD countries. The analysis highlights the different tax rates that apply to energy in both groups, with higher and more consistent taxation of energy being observed in the EU-21 countries than in the OECD as a whole. Nonetheless, differences in the taxation of fuels used for similar purposes, or between users of fuels are observed across and within all countries examined. From an environmental policy perspective differences of particular note include the common tax preference provided to diesel relative to gasoline for road use and the low tax rates applied to many fuels employed for heating and process use, and particularly to coal. The analysis suggests that countries are not fully harnessing the full power of taxes on energy use for environmental purposes and that realignment of energy taxes could help to ensure that countries pursue their environmental, social and economic goals as effectively as possible.
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Notes
- 1.
The 21 EU countries which are also members of the OECD are Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom.
- 2.
An additional complication is the need to take account of the impact of commodity taxes on the labour market. Commodity taxes push up commodity prices and thereby reduce the consumption value of wages, tending to discourage labour effort. A solution is to tax goods that are complements with leisure more heavily than other goods in order to make leisure less attractive (Corlett and Hague 1953; Diamond and Mirrlees 1971; Crawford et al. 2010). Due to the difficulties of implementing this kind of differential taxation, Crawford et al. (2010) concluded that, externality issues aside, there is a strong pragmatic case for uniformity in commodity taxation.
- 3.
OECD (2006) discuses in more detail the different approaches to environmental taxation taken in OECD countries and the related political economy challenges.
- 4.
These sub-national taxes can be significant, and are often set at higher levels than federal ones. For example, state diesel and gasoline excise rates in the United States are often similar to or higher than federal excise rates and Canadian provincial rates are generally higher than federal rates (although combined rates are still low in both countries relative to most other OECD countries). Other sub-national measures, such as the California cap-and-trade programme and the carbon tax in British Columbia, also add to the effective tax burden.
- 5.
The European Commission proposed a new Energy Taxation Directive in 2011 (see European Commission 2011). The proposed rules aim to promote energy efficiency and consumption of more environmentally friendly products and to avoid distortions of competition in the Single Market. Under the revised directive, taxes on energy would have two components: a single minimum rate for CO2 emissions (EUR 20 per tonne of CO2) for all sectors that are not part of the EU ETS; and minimum rates based on the energy content of the fuel, which will be more uniform across types of fuel. These components would be combined to produce the overall minimum tax rate at which fuel products would be taxed. Countries would be able to choose to exceed one or both minimum rates, although the same rate would then apply to all fuels used for the same purpose. Transitional periods would apply for certain fuels to allow government and industry to adapt, with full implementation intended from 2023. In addition, certain country-specific transition periods are proposed.
- 6.
- 7.
Since these social costs generally vary by location and traffic conditions, kilometre-based charges would be a much more direct and efficient way of addressing them (e.g., kilometre-based charges on busy roads that progressively rise and fall during the course of the rush hour to reduce congestion). Innovations in transport pricing that allowed increased use of distance-based or congestion charges would reduce the level of fuel taxes required to address these external costs.
- 8.
A litre of diesel is also typically associated with higher emissions of local air pollutants, but these are not taken into account in the analysis.
- 9.
The above calculation is based on a static analysis. In considering revenue from increases in diesel tax rates, it is important to consider the behavioural impacts of such an increase in reducing the consumption of diesel fuel (possibly together with increases in consumption of gasoline or other road fuels). Dahl (2012) estimates the median price elasticity for diesel as −0.16, although estimates vary considerably across OECD countries, from −0.01 in the Netherlands to −0.74 in Canada.
- 10.
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Harding, M., Martini, C., Thomas, A. (2016). Taxing Energy Use: Patterns and Incoherencies in Energy Taxation in Europe and the OECD. In: Bardazzi, R., Pazienza, M., Tonini, A. (eds) European Energy and Climate Security. Lecture Notes in Energy, vol 31. Springer, Cham. https://doi.org/10.1007/978-3-319-21302-6_11
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