EU Carbon Tax - Limited impact upon cement industry expected

On 13 April 2011, The European Commission has issued, as expected, its proposal for a smarter approach to energy taxation. The idea is to amend the Directive on the taxation of energy products and electricity in order to impose a carbon tax.

A distinction would be introduced between, on the one hand, energy taxation based on the energy content of energy products (the so-called general energy consumption taxation) and, on the other hand, taxation specifically linked to CO₂ emissions attributed to the consumption of energy products including electricity.

The first element (general energy consumption tax) is not new and would remain unchanged compared to the original Directive (2003/96/EC). The purpose being to tax energy used for heating and motor purposes, the use of energy products in the cement industry has been intendedly excluded from the scope of the Directive, which imposes minimum rates of taxation, because the energy used in the cement manufacturing process is necessitated to achieve a mineralogical transformation, not for heating or motor purposes. The same rationale has led to exclude also from the scope the use of energy in the lime, glass, gypsum and ceramics industries.

The second element – the CO₂ tax – is new. It shall apply in principle to all energy products but will not – this is mandatory – apply to use of energy products in installations falling within the scope of the Emission Trading Directive¹. Energy used for the production of cement clinker in rotary kilns with a production capacity exceeding 500 tonnes per day or in other furnaces with a production capacity exceeding 50 tonnes per day will thus be exempted whereas the energy used in installations with a lower capacity or in grinding plants will be subject to the CO₂ tax.

Transitional provisions are included in order to avoid carbon leakage while maintaining the environmental benefit of the CO₂ tax.

It is important to note that, as the specific CO₂ emissions factors and net calorific values for biomass or products containing biomass are subject to sustainability criteria established by Article 17 of Directive 2009/28/EC on the promotion of the use of energy from renewable sources, biofuels and bioliquids not complying with the sustainability criteria will be taxed on the basis of the CO₂ emission factor and of the net calorific value of the equivalent motor or heating fuel.

As all taxation issues, the proposed carbon tax will have to be approved, in accordance with Article 113 TFEU, by a unanimous vote in Council – one Member State one vote. The European Parliament’s role is limited to giving an advisory opinion. Experience shows that it is very difficult to reach unanimity in Council where it took 8 years of heated discussion to reach agreement on the original Directive on Taxation of Energy Products (2003/96/EC) even though, at the time, the EU counted only 15 Member States. At present it is already known that Germany, Ireland, Luxembourg and the UK are not favourable to the new Carbon Tax proposal. It is highly improbable that the European Council (Heads of State and Government) would unanimously decide, as allowed by

Article 48 paragraph 7 TEU, to opt for a weighted majority decision on such a highly sensitive tax issue.

The Commission Communication can be found here:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0168:FIN:EN:PDF