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Insight from Brussels: Taxing times for diesel in Europe

Ending tax breaks for fossil fuels like diesel is a key policy pledge for the incoming EU commissioners, as part of the drive to make the EU carbon neutral by 2050.

This is set to be a major test of national governments’ commitment to reducing fossil fuel use, as fuel tax changes are very visible to voters.

Any tax changes, if eventually imposed, could have a major impact on demand for diesel, gasoline, biofuels, natural gas and electricity in transport, by changing the relative cost of various fuels.

The European Commission has estimated that excise duty revenues on electricity and energy products collected across the EU total around €225 billion ($249 billion) per year. The importance of these revenues to national budgets varies from 1.1% to 3.2% of GDP, so individual governments as well as different energy producers and users are likely to have very different interests.

The EU’s transport sector is already facing stricter CO2 emission standards for new cars and trucks from 2025 as part of efforts to encourage alternative fuels such as electricity, biofuels, hydrogen and LNG.

These efforts will continue, as new European Commission president Ursula von der Leyen has said cutting transport emissions will be a key policy focus over the next five years.

She has asked the incoming EU economy commissioner, Paolo Gentiloni, to lead work on changing EU energy tax rules to support the EU’s climate and energy goals, and to end fossil-fuel subsidies.

Diesel’s tax advantage

The EU last agreed minimum energy taxation rates back in 2003, when the focus was on creating a competitive internal market, and diesel was favored over petrol as a more efficient transport fuel.

The minimum excise duty for unleaded gasoline became €359 per 1,000 liters, compared with €302 per 1,000 liters for diesel fuel. The diesel rate rose to €330 per 1,000 liters in 2010, but remained lower than unleaded gasoline.

Most national governments apply higher taxes than the minimum rates, and these vary significantly across the EU. The rules allow governments to tax energy products differently based on their sulfur content, energy content, CO2 emissions, biofuel shares, or commercial use, for example.

This means road freight diesel may have tax breaks that deter “more sustainable transport modes,” according to a European Commission evaluation of the 2003 energy taxation directive in September.

Such favorable rates for diesel in the directive have contributed to “excessive dieselization” of Europe’s road vehicles, the EC said. It argued that these rates work against the EU’s transport policy goals to reduce carbon emissions and air pollution.

Diesel/gasoil road transport demand in Western Europe averaged 5,800 million b/d in 2018, according to Platts Analytics. This is 4% higher than the average 5,574 million b/d in 2003, before the current tax rules applied.

In contrast, unleaded gasoline road transport demand in Western Europe averaged 1,767 million b/d in 2018, down 33% on the 2,649 million b/d average demand in 2003, Platts Analytics data shows.

Unanimity challenge

The EC last tried to update the EU’s energy taxation directive in 2011, when it proposed new minimum EU energy tax rates to start in 2013 based on CO2 emissions and energy content rather than volumes.

But the proposal failed to achieve the unanimous approval needed from finance ministers in the EU Council to become law, and the EC eventually withdrew it.

Attitudes are now changing, according to Finnish finance minister Mika Lintila, who is leading the finance ministers’ debates during the Finnish EU presidency until the end of 2019. All EU finance ministers agreed in September that energy taxation could help the EU meet its climate and energy goals.

The minimum tax rates set in the 2003 directive “do not reflect any specific logic and are too low, which means they do not encourage energy-efficient technology and emission-free activities,” according to the Finnish EU presidency.

It called for the directive to be revised to differentiate between renewable and non-renewable fuels, and differences in greenhouse gas emissions.

The current directive taxes fuels according to volume, not energy content, which discriminates against renewable fuels in favor of conventional fuels, particularly diesel, the EC said in policy paper in April.

The directive also does not cover new fuels, or energy storage, and exempts international aviation and maritime transport from fuel taxes.

Popular protests

The ministers may have been swayed by the rise in climate protest marches across Europe, such as those inspired by the teenage Swedish activist Greta Thunberg.

Around 15,000 people took to the streets in Brussels in September for example, to protest against governments’ inaction on climate change. This was part of coordinated protests in other major cities across the world.

But the protests can also go the other way, as demonstrated when French president Emmanuel Macron was forced in 2018 by the gilets jaunes – yellow vests – to drop a fuel tax rise.