The Coordination of Energy Taxes and ETS

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2 16 th Global Conference on Environmental Taxation The Coordination of Energy Taxes and ETS Prof. Lorenzo del Federico University of Chieti Pescara, Italy Director of CIRTE - Roma (Inter University and International Center of European Tax Research) Dr. Silvia Giorgi Lecturer University of Trento, Italy University of Technology, Sidney September 2015

3 Why coordinate? Taxation Prof. L. del Federico - Dr. Silvia Giorgi 3

4 OUTLINE EU Commission proposal of the 13 April 2011 : coordination of energy taxes and ETS why coordinate? The ETS focus on free and auctioning allowances What about ETS tax nature? Exemption from energy taxes and free allowances Is it an environment oriented solution? Final remarks 4

5 Background The 2011 EU Commission s proposal provides extending the scope of the Energy Taxation Directive when it comes to CO2-related taxation to energy products already falling within the scope of Directive 2003/87/EC At the same time it provides an obligatory exemption from CO2-related taxation in cases subject to the Community scheme under the Directive 5

6 The Test Does the proposal exceed the purpose to remove current imbalances, in the context of free of charge allowances? Is the Commission s proposal consistent with the overriding environmental principles (PPP, precautionary and preventive action, correction at source)? 6

7 A step back: ETS allowance allocation criteria 3 Phases: (95% free allocation); (90% free allocation); from 2013 onwards auctioning has become the default method for allowance emission allocation, but there are some derogations: Sectors of district heating and high efficiency cogeneration (art. 10, par. 4 ETS Directive); New entrants; Carbon leakage risk sectors Aviation sector 7

8 ETS and environmental principles The cap = accettable risk the amount of emissions within the cap is compliant with the PPP as compensation per tonne of CO2 produced Beyond the cap, further Co2 shall not be produced according to the prevention principle it is a suitable measure in order to reduce the risk of damage (restoration ex ante) Only auctioning allowances are compliant with the PPP, which also promote competition 8

9 Is the ETS a Tax? Allowance (asset) Obligation to buy a certain amount of allowances proportional to CO2 emissions The tax nature question is relevant 9

10 ECJ ECJ excludes ETS tax nature because unlike a duty, tax, fee or charge on fuel consumption, the scheme introduced by Directive 2003/87 as amended by Directive 2008/101, apart from the fact that it is not intended to generate revenue for the public authorities, does not in any way enable the establishment, applying a basis of assessment and a rate defined in advance, of an amount that must be payable per tonne of fuel consumed for all the flights carried out in a calendar year (ECJ, C366/10, 21 December 2011, par. 143, Air Transport Association of America and Others vs. Secretary of State of Energy and Climate Change) 10

11 Objections ECJ s reasons aren t fully persuasive: Allowances bought through auction from public authorities satisfy the condition of revenue functionalization to public expenditure The Court s second objection could be considered more valid in the passage where it states the lack of an assessment basis and a rate defined in advance 11

12 Tax Function The ETS can be defined as a hybrid and multipurpose mechanism, with a latu sensu tax function, combined with the prevalent environmental one 12

13 Free allocation: from coordination to double exemption CO2 Energy Taxation exemptions can be summed to the free allowances allocations double exemption Free allocation hypotheses are justified, in most cases, by the need to avoid the risk of carbon leakage, that is the transfer to extra-european countries in which environmental restraints are less strict Both PPP and internal market competition can be sacrificed because of the higher aim to protect European companies from external competition 13

14 What are the perspectives? To avoid the double no taxation phenomenon Tax Credit could be a better instrument 14

15 Economic policies? Structure and operation of such means of coordination are expression of industrial and economic policies (rather than legal choices); Values, needs and risks to be balanced are always the same: environmental principles, internal market protection, risk of carbon leakage... 15

16 Possible Guidelines Tax credit should be proportional to the maximum amount of CO2 taxes imposed on the operator; Case 1. CO2 taxes exceed the amount paid in ETS the operator should pay said difference; Case 2. The amount paid in ETS exceeds CO2 taxes, there is no extra credit to bank for the following years or to sell to other operators the difference will be charged to the operator. 16

17 Many thanks for your attention 17

18 References M. VILLAR EZCURRA, State Aids and Energy Taxes: Towards a Coherent Reference Framework, in Intertax, 2013, 41, 340; J.E MILNE M.K. ANDERSEN, Introduction to environmental taxation concept and research, in J.E MILNE M.K. ANDERSEN., Handbook of research on environmental taxation, Cheltenham, 2012 R. ANTES B. HANSJÜRGENS P. LETMATHE- PICKL, Emission trading. Institutional design, decision marking and corporate strategies, Heidelberg Dordrecht - London New York, 2011; Á. ANTÓN ANTÓN I. BILBAO ESTRADA, State Aid and the EU Council Directive 2003/96/EC : The Case for Argumenting the Environmental Component, in C. DIAS SOARES, J. E. MILNE, H. ASHIABOR, L. KREISER, K. DEKETELAERE (eds), Critical Issues in Environmental Taxation. International and Comparative Perspectives, vol. VIII; Oxford, 2010, 448 seq.; C. SOARES, Energy tax treatment of undertakings covered by emission trading, in EC Tax review, 2007, 4, 184 seq; L. DEL FEDERICO, Public Finance, State Aid and Tax Relief for Areas Struck by Natural Disasters and Pollution: an Introduction, P. MASTELLONE, L. DEL FEDERICO, M. BASILAVECCHIA, Tax Implications of Environmental Disasters and Pollution, The Netherlands, 2015, 1. 18

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