European Union finance ministers look set to reject a European Commission proposal to tax fuels based on their carbon dioxide emissions. But Algirdas Šemeta, the European commissioner for taxation, has condemned such thinking as short-sighted.

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In April 2011, the Commission proposed that tax on fuel should be based on its energy intensity – and the corresponding CO2 emitted – rather than quantity. This would mean diesel fuel, which has a higher energy content than petrol, could no longer be taxed at a preferential rate, as it is in all member states except the UK.

Many member states reject basing all fuel taxes on CO2 emissions, and some – notably Germany, Poland and the UK – are opposed to the entire proposal. Tomorrow (22 June), Denmark, which holds the rotating presidency of the Council of Ministers, will try to break the impasse by discussing what compromise might be acceptable.

One option might be to limit the requirement for CO2-based taxation to the minimum taxation rate set by the EU, but not to rates above it. Most countries set their fuel taxes well above the minimum. Another option would be to exempt commercial vehicles.

Growth-friendly tax

The Commission is eager for progress on the issue. It was envisaged that this directive would come into force at the beginning of next year. Šemeta believes that setting energy taxation more strategically is essential for growth. “We have recommended to 11 member states to consider ways to shift taxation from labour to more growth-friendly taxes,” he said.

“Environmental taxes, including energy taxes, are treated as the most growth-friendly taxes.” He added: “The proposal is very simple. It is not the invention of a new tax but a restructuring of tax.

The present system is based on historical grounds and does not have any systematic approach to it.” But the car industry says such an approach could hurt the diesel market, affecting carmakers and penalising those who drive diesel-powered cars.

Many MEPs hold the same view. In February, the European Parliament voted in favour of maintaining cheaper rates for diesel fuel. However, because the issue involves taxation, only member states will get a say. The Commission disputes the industry’s assertions, saying that the proposal will merely discourage the growth of diesel rather than bring about its demise.

Šemeta said that many other industries are supportive. The proposal would eliminate the problem of double taxation currently experienced by industries covered by the emissions trading system. “EU industry is not only the car industry,” he said.

“It is a pity that their voice is heard the most [in this debate].” He said he did not believe the proposal would damage the motor industry, pointing out that the change would have a long transition period and there would be time to adjust. If none of the compromise ideas is acceptable, the issue is likely to be shelved until next year.