Higher Costs Await as the EU Continues Energy Tax Reform Talks

EU leaders will gather on Dec. 10 for their latest attempt at compromise on a controversial overhaul of the bloc’s electricity and fuel tax system. Businesses must not lose sight of the economic and environmental implications at stake, lest they be unprepared for tax changes when the EU finally modernizes its approach to energy taxation.

It would be understandable if the upcoming meeting barely registered on taxpayers’ collective radar. Unanimous approval of the EU’s 27 countries is unlikely, so the bloc will enter another year without an updated Energy Taxation Directive, or ETD. Meanwhile, the deadline for the EU’s Fit for 55 package, which aims to reduce carbon emissions by at least 55% by 2030, creeps steadily closer.

Revising the ETD is complicated. All 27 countries must accept a specified tradeoff between environmental benefits and the economic and social costs of achieving them. The ongoing attempt to harmonize those outcomes is stuck on several points of contention, most notably exemptions for shipping and aviation fuel.

The Hungarian presidency of Council of the EU at least believes its latest proposal “reflects a fragile compromise” and implored delegations to “show flexibility.” Examining the proposal through such an earnest lens, it’s clear the legislation would affect all energy users, driving economic changes for both businesses and individuals.

Costs and Opportunities

The proposed ETD would assess taxes based on the environmental impact rather than volume used. So the most polluting fuels—coal, oil, and gas—would be subject to higher minimum rates than sustainable biofuels.

Since taxes represent a large share of final energy prices, which can profoundly affect consumption and types and uses of energy, businesses and individuals alike would encounter higher costs.

Businesses that use less-sustainable energy products or electricity would feel the heaviest weight. Those that emit greenhouse gases would see increased costs and administrative burdens that may considerably impact the cost structure—and, ultimately, price—of various products.

Sectors most affected would include energy and utilities, manufacturing, transportation, and aviation, due to high energy consumption and emissions. Companies in those industries would need to purchase allowances for their emissions and adopt cleaner, more expensive technologies to reduce their carbon footprint.

Also, compliance with the ETD’s reporting and monitoring requirements may increase administrative tasks. This could cause financial strain to businesses with limited finances, including farmers.

However, those costs do come with potential benefits. Investing in cleaner technologies may be expensive, but the changes may result in innovation and long-term cost savings. Businesses that invest early in sustainable practices can gain a competitive edge.

This move to greener technologies may cause traditional carbon-reliant industries to reduce their workforce, but the shift toward such technologies and renewable energy may create new jobs.

Manufacturers may mitigate the challenges presented by the ETD by investing in energy efficiency; transitioning to renewable energy sources such as solar, wind, or biomass; managing the supply chain; and carbon offsetting. They can replace equipment with energy-efficient machinery, optimize production processes to reduce emissions, replace some inputs with low-emission materials, and implement energy management systems to monitor and control energy use.

Companies also can consider installing on-site renewable energy systems. Investing in reforestation or renewable energy projects could help them offset unavoidable carbon emissions, or they could purchase carbon credits to comply with emissions regulations while implementing longer-term strategies.

Finally, they can conduct research and development in pursuit of lower-emission technologies and products and re-engineer their production processes to reduce waste and increase efficiency.

Under a revised ETD, individuals likely would see higher prices for goods and services, as companies are likely to pass on increased costs. This especially applies to the transportation and manufacturing sectors due to their reliance on fossil fuels. This may translate to higher household heating costs, fuel prices, and airfare.

To counter those increases, expect individuals to balance their financial priorities with their climate ambition—just as the EU nations are doing. Individuals could reduce their carbon footprint. They could lower energy consumption by switching to energy-efficient appliances, reducing heating and cooling usage, choosing green energy sources, installing solar panels, and switching to LED lighting. Some may choose public transportation, bicycles, walking, or using electric vehicles to reduce emissions.

Chances to Prepare

Approving a revised ETD would shift Europe toward a more sustainable and environmentally conscious continent by balancing economic growth with environmental stewardship for both businesses and individuals.

As businesses incur higher minimum tax rates, and therefore operational costs, on less-sustainable energy products, they may be encouraged to develop eco-friendly technologies. Individuals, meanwhile, would face increased costs for products and energy, which may compel them to change their consumption patterns.

The transition will likely be challenging, but it’s essential to meeting the EU’s ambitious climate targets and promoting a more sustainable economic future. Taxpayers can position themselves to adapt by not losing sight of the implications, regardless of how long it takes the EU to take this arduous legislative action.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jodi Ader is senior manager in RSM US’ trade and tariff advisory services practice.

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