In 1999, the European Union (EU) introduced a harmonised excise duty on electricity use with the dual aim of raising revenue for Member States and encouraging frugal electricity use in light of climate goals. However, the landscape has changed significantly since then, with more targeted environmental policies now in place.
Since 2015, the EU’s Emissions Trading System (EU ETS) has capped the number of allowed greenhouse gas emissions, including those from electricity production. Additional taxes levied on covered activities do not change the number of permitted emissions but simply shift them towards less-valuable uses outside of the ETS emissions base. This introduces a distortive double taxation without associated environmental benefit.
Despite this, the EU’s Energy Tax Directive still requires Member States to impose an electricity duty at minimum rates of EUR 0.5 per MWh for business use and EUR 1 for non-business use. Many Member States impose far higher rates, with the Netherlands charging the highest top rate at EUR 108.8 per MWh.
There is considerable heterogeneity in the rate structures and tax bases that Member States use to impose an electricity duty. Some countries apply regressive rate structures, favouring larger energy-intensive companies, while others exempt certain sectors such as agriculture and public transport.
One metric used to measure the efficiency of tax collection is the c-efficiency ratio. This is the ratio of actual revenue and hypothetical revenue if the top tax rate were applied uniformly to the entire consumption tax base. In 2022, EU Member States captured less than half of their base, with the Netherlands capturing the least due to negative revenues.
Given that the electricity sector is already subject to more efficient and targeted policies under most Member States’ VAT systems or the EU ETS, there is no economic justification to apply a separate excise tax on electricity. Sectoral or source-based exemptions and rate differentials introduce additional economic distortions and complexity to the tax code. Member States should therefore seek to minimize the rate and broaden the base of electricity duties, consolidating their rates to the required minimum rate.
This analysis underscores the need for a more efficient and simplified tax structure. It is crucial to strike a balance between raising revenue, encouraging responsible electricity use, and avoiding unnecessary complexity and economic distortions. For more information, you can refer to the original article here.