FAIR TAX - EUROPE’S WAY TO ECONOMIC GROWTH AND SOCIAL EQUALITY ‘FISCAL EU’: FAIR, SUSTAINABLE AND COORDINATED TAX AND SOCIAL POLICIES An international research consortium working on alternative tax policies and new fiscal models for building the future of EU FAIR TAX - EUROPE’S WAY TO ECONOMIC GROWTH AND SOCIAL EQUALITY The project is funded by the European Union’s Horizon 2020 research and innovation programme 2014-2018, grant agreement No. FairTax 649439

Fuel taxation as future EU own resource Danuse Nerudova, Marian Dobranschi and Veronika Solilova

Structure Fuel taxation in the EU – current status and future perspectives Future EU fuel tax vs. current system of EU budget resources Review of relevant arguments brought forward by traditional literature: - social costs internalization – Pigou’s tax - efficiency concerns and distributional effects of fuel tax - double dividend hypothesis - fuel taxes criticism in the EU – between ETD and ETR The current situation of fuel taxes in EU28 The future EU fuel tax as an option - evaluation Revenue potential of future EU fuel taxes Concluding remarks

Fuel taxes in the EU – literature approach Fuel taxes in the EU aim to preserve, protect and improve the quality of environment, also reduce climate change and promote rational consumption of natural resources (Art. 191(2) - TFEU). Fuel taxes – market based instruments implemented according to the polluter’s pay principle. Literature review: corrective taxation (Pigou, 1932), social costs internalization (Nordhaus, 2006; Stern, 2006), double dividend hypothesis (Goulder, 1996, 2013; Bovenberg and Goulder, 1996), revenue potential validation (Dahl, 1993, 2011; Pock, 2010), distributional effects (Poterba, 1991; Sallee, 2011; West, 2002). Challenges of fuel taxes in the EU: efficiency to decrease CO2 (Sterner, 2007), increase energy security (T&E, 2011, 2015), biased policy towards diesel consumption versus gasoline (Schipper et al. (2002), Schipper and Fulton (2012), Kageson (2012)). Fuel tax competition – Luxembourg Case (Thone, 2016), ETR – (Ekins, 2009), needed ETD revision (Thone, 2016; T&E, 2011, 2015). Fuel taxes as EU tax – Thone (2016).

Fuel taxes in the EU – future perspectives Fuel taxes in the EU are one of the major instruments to meet the EU’s commitments to Kyoto Protocol (1992) and Paris Agreement (2016) to reduce carbon emissions and tackle climate change. Potential instrument to reach EU2020 objectives of smart and sustainable growth in environmental area, by promoting a green and resource efficient economy. Fossil fuel taxation in the EU is harmonized by Energy Taxation Directive (2003) but it needs revision – Minimum tax rates for gasoline – 0.359 EUR cent and 0.33 EUR cent for road diesel. Is fuel tax (excise duties on gasoline and diesel) an appropriate future EU tax?

The current situation of fuel taxation in the EU

Total transport fossil fuels consumption The diesel and gasoline fuel consumption in the EU member states in 2014 Country Diesel consumption In 2014 Gasoline consumption Total transport fossil fuels consumption Billion liters EU28 323.07 107.93 431 Austria 8.821 2.205 11.026 Belgium 13.057 1.741 14.798 Bulgaria 1.915 0.580 2.495 Croatia 0.754 2.669 Cyprus 0.470 1.224 Czech Republic 5.165 2.089 7.254 Denmark 4.584 1.799 6.383 Estonia 0.870 0.325 1.195 Finland 4.758 2.031 6.790 France 55.071 9.401 64.472 Germany 62.673 24.895 87.568 Greece 4.933 3.366 8.298 Hungary 3.424 Ireland 3.888 1.567 5.455 Italy 32.961 11.896 44.857 Latvia 1.103 0.279 1.381 Lithuania 0.453 0.267 0.720 Luxembourg 2.321 0.418 2.739 Malta 0.435 0.099 0.534 Netherlands 9.807 5.107 14.914 Poland 14.159 4.817 18.976 Portugal 5.571 1.451 7.022 Romania 5.281 Slovakia 1.857 2.611 Slovenia Spain 33.60 6.209 39.809 Sweden 3.946 10.155 United Kingdom 35.573 17.409 52.982

Gasoline and diesel tax revenues vs Gasoline and diesel tax revenues vs. the GNI and VAT contributions to the EU budget in 2014 Country Gasoline tax revenues Diesel tax revenues Total tax revenues from transport fuels VAT-based own resource GNI-based own resource Billion EUR EU28 45.07 126.33 171.40 17.66 99.07 Austria 0.827 3.308 4.135 0.453 2.196 Belgium 1.038 3.504 4.542 0.509 2.862 Bulgaria 0.215 0.684 0.899 0.059 0.315 Croatia 0.260 0.66 0.920 0.063 0.295 Cyprus 0.220 0.144 0.364 0.023 0.108 Czech Republic 0.912 1.984 2.896 0.184 1.023 Denmark 1.291 2.203 0.279 1.743 Estonia 0.138 0.251 0.389 0.026 Finland 1.298 1.246 2.544 0.271 1.364 France 5.697 17.84 23.537 2.956 15.01 Germany 10.44 26.28 36.720 3.699 21.72 Greece 2.251 1.38 3.631 0.286 1.410 Hungary 0.659 1.295 1.954 0.118 0.700

Gasoline and diesel tax revenues vs Gasoline and diesel tax revenues vs. the GNI and VAT contributions to the EU budget in 2014 Country Gasoline tax revenues Diesel tax revenues Total tax revenues from transport fuels VAT-based own resource GNI-based own resource Billion EUR EU28 45.07 126.33 171.40 17.66 99.07 Ireland 0.865 1.459 2.324 0.203 1.111 Italy 6.654 18.43 25.091 1.760 11.43 Latvia 0.110 0.280 0.390 0.032 0.193 Lithuania 0.119 0.419 0.538 0.040 0.254 Luxembourg 0.192 0.699 0.891 0.038 0.171 Malta 0.087 0.091 0.178 0.011 0.049 Netherlands 3.968 3.281 7.249 0.819 5.490 Poland 1.619 4.759 6.378 0.445 2.785 Portugal 0.700 1.310 2.010 0.242 1.270 Romania 0.73 2.135 2.865 0.161 1.090 Slovakia 0.354 0.716 1.070 0.069 0.502 Slovenia 0.304 0.715 1.019 0.053 0.247 Spain 2.478 9.201 11.679 1.382 7.845 Sweden 2.022 2.157 4.179 0.553 3.217 UK 13.12 20.79 33.91 2.933 14.52

Evaluation of fuel taxes as potential EU tax Traditional Evaluation Criteria   Equitable Low Medium High X  x Transparent Cost-effective Simple Degree of regional attribution Mobility of tax base Short-term volatility Long-term yield Equality of gross-burden-sharing at the national level

Evaluation of fuel taxes as potential EU tax Potential to close in the tax system sustainability gaps   High and increasing weight of labor taxes Low Medium High x  Decreasing progressivity of tax systems Decrease the importance of Pigovian taxes Tax competition – fuel tax competition Tax compliance and tax fraud

The EU fuel taxes revenue potential compared with EU budget own resources in 2014 Full Replacement of EU own resources EU fuel tax rate 3 cent 5 cent 10 cent 20 cent Revenue potential of diesel tax rates aligning with gasoline tax Bil. EUR Fuel excise duty in EUR/l % VAT-based own resource 17.667 0.04 73.19 121.98 243.96 487.91 202.82 GNI-based own resource 99.076 0.23 13.05 21.75 43.50 87.01 36.17 Traditional own resources (TOR) (75%) 16.429 78.70 131.17 262.34 524.68 218.10 Customs duties (100%) 21.998 0.05 58.78 97.97 195.93 391.86 162.89 Amounts (25%) retained as TOR collection costs (-) 5.543 0.01 233.26 388.76 777.53 1555.06 646.41 Other revenue 9.973 0.02 129.65 216.08 432.16 864.32 359.28 Gross National Income (GNI) 139.217 0.32 9.29 15.48 30.96 61.92 25.74 TOTAL own resources 132.961 0.31 9.72 16.21 32.42 64.83 26.95 TOTAL national contribution 116.532 0.27 11.10 18.49 36.99 73.97 30.75 TOTAL REVENUE 143.940 0.33 8.98 14.97 29.94 59.89 24.89 TOTAL EXPENDITURE 128.565 0.30 10.06 16.76 33.52 67.05 27.87 TOTAL EU Expenditure 142.497 9.07 15.12 30.25 60.49 25.15 The revenue capacity of each simulated EU fuel tax rate 12.93 21.55 43.10 86.20 35.83

The revenues potential of aligning diesel fuel tax rate with gasoline tax rate in the EU 28 member states Country Diesel fuel consumption in 2014 Revenues potential of aligning nominal diesel tax rate with gasoline tax rate Bil. Liters Bil. EUR EU28 323.072 35.833 Austria 8.821 0.738 Belgium 13.057 1.477 Bulgaria 1.915 0.063 Croatia 0.204 Cyprus 0.754 0.022 Czech Republic 5.165 0.361 Denmark 4.584 0.897 Estonia 0.870 0.026 Finland 4.758 0.759 France 55.071 7.545 Germany 62.673 11.538 Greece 4.933 1.680 Hungary 3.424 0.053 Ireland 3.888 0.423 Italy 32.961 3.659 Latvia 1.103 0.104 Lithuania 0.453 0.047 Luxembourg 2.321 0.295 Malta 0.435 0.034 Netherlands 9.807 2.799 Poland 14.159 0.688 Portugal 5.571 1.199 Romania 5.281 0.162 Slovakia 1.857 0.305 Slovenia 0.144 Spain 33.600 3.156 Sweden 6.209 0.454 United Kingdom 35.573 0.000

The EU fuel tax revenue potential simulation using adjusted fuel tax rates according to each EU country GDP in PPS Country GDP in PPS, EU=100 in 2014 Total transport fuels   EU fuel tax rate 3 EUR cents adjusted by GDP in PPS Revenues potential of EU fuel tax rate of 3 EUR cents 5 EUR cents adjusted by GDP in PPS Revenues potential of EU fuel tax rate of 5 EUR cents 10 EUR cents adjusted by GDP in PPS Revenues potential of EU fuel tax rate of 10 EUR cents 20 EUR cents adjusted by GDP in PPS Revenues potential of EU fuel tax rate of 20 EUR cents Bil. Liter EUR Bil. EUR EU 28 average 100 431.008 3 13.759 5 22.878 10 45.862 20 91.724 Austria 129 11.026 3.87 0.427 6.35 0.700 12.9 1.422 25.8 2.845 Belgium 118 14.798 3.54 0.524 5.85 0.866 11.8 1.746 23.6 3.492 Bulgaria 47 2.495 1.41 0.035 2.3 0.057 4.7 0.117 9.4 0.235 Croatia 59 2.669 1.77 0.047 2.9 0.077 5.9 0.157 0.315 Cyprus 82 1.224 2.46 0.030 4.05 0.050 8.2 0.100 16.4 0.201 Czech Republic 84 7.254 2.52 0.183 4.25 0.308 8.4 0.609 16.8 1.219 Denmark 125 6.383 3.75 0.239 6.2 0.396 12.5 0.798 25 1.596 Estonia 76 1.195 2.28 0.027 3.7 0.044 7.6 0.091 15.2 0.182 Finland 110 6.790 3.3 0.224 5.4 0.367 11 0.747 22 1.494 France 107 64.472 3.21 2.070 5.3 3.417 10.7 6.898 21.4 13.797 Germany 126 87.568 3.78 3.310 6.25 5.473 12.6 11.034 25.2 22.067 Greece 73 8.298 2.19 3.55 0.295 7.3 0.606 14.6 1.212 Hungary 68 5.165 2.04 0.105 3.4 0.176 6.8 0.351 13.6 0.702 Ireland 134 5.455 4.02 0.219 7.25 0.395 13.4 0.731 26.8 1.462 Italy 96 44.857 2.88 1.292 4.75 2.131 9.6 4.306 19.2 8.613 Latvia 64 1.381 1.92 3.2 6.4 0.088 12.8 0.177 Lithuania 75 0.720 2.25 0.016 7.5 0.054 15 0.108 Luxembourg 266 2.739 7.98 13.55 0.371 26.6 0.729 53.2 1.457 Malta 86 0.534 2.58 0.014 4.45 0.024 8.6 0.046 17.2 0.092

The EU fuel tax revenue potential simulation using adjusted fuel tax rates according to each EU country GDP in PPS Country GDP in PPS, EU=100 in 2014 EU fuel tax rate 3 EUR cents adjusted by GDP in PPS Total transport fuels   Revenues potential of EU fuel tax rate of 3 EUR cents 5 EUR cents adjusted by GDP in PPS Revenues potential of EU fuel tax rate of 5 EUR cents 10 EUR cents adjusted by GDP in PPS Revenues potential of EU fuel tax rate of 10 EUR cents 20 EUR cents adjusted by GDP in PPS Revenues potential of EU fuel tax rate of 20 EUR cents EUR Bil. Liter Bil. EUR EU 28 average 100 431.008 3 13.759 5 22.878 10 45.862 20 91.724 Netherlands 131 3.93 14.914 0.586 6.45 0.962 13.1 1.954 26.2 3.907 Poland 68 2.04 18.976 0.387 3.45 0.655 6.8 1.290 13.6 2.581 Portugal 78 2.34 7.022 0.164 3.85 0.270 7.8 0.548 15.6 1.095 Romania 55 1.65 0.116 2.85 0.200 5.5 0.386 11 0.772 Slovakia 77 2.31 2.611 0.060 0.101 7.7 0.201 15.4 0.402 Slovenia 82 2.46 2.495 0.061 4.15 0.104 8.2 0.205 16.4 0.409 Spain 91 2.73 39.809 1.087 4.6 1.831 9.1 3.623 18.2 7.245 Sweden 123 3.69 10.155 0.375 6.15 0.625 12.3 1.249 24.6 2.498 United Kingdom 109 3.27 52.982 1.732 2.914 10.9 5.775 21.8 11.550

Conclusions Future EU fuel taxes have a high potential to close the main sustainability gaps of current tax systems across the EU, such as: decreasing the tax system dependency on labor taxes, decreasing the importance of the Pigovian taxes (e.g. internalizing the cross- border negative externalities of pollution and global climate change) curb fuel tax competition among the EU countries. fuel taxes are transparent, cost-effective and simple to collect, future EU fuel tax would also improve the tax compliance and reduce the tax fraud. Future EU fuel taxes have a high revenues potential in replacing the current system of EU own resources. Future EU fuel taxes could yield a global positive spill-over of environmental protection through pollution decrease and reduce climate change.