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European Union Mulling Dramatic Revamp of Energy Taxes

There are a couple of truisms when it comes to taxes, energy and the European Union. Truism #1 is that as long as fossil-based electricity such as coal-fired plants is cheaper than renewables such as solar or wind, the renewable energy sector won't stand a chance for further capital investment, which it desperately needs. Truism #2 is that taxes that hit the middle class are never going to be popular, meaning that any government that tries to impose an energy tax or carbon tax that raises the prices of transportation or heating homes is going to be out of a job pretty quickly. Truism #3 is that in Europe, in spite of startling successes in creating an integrated economy (current problems notwithstanding), tax policy remains incredibly fragmented within the individual member states.

Now, the European Union is mulling a plan that would tackle all three truisms at the same time while addressing energy policy goals. The EU currently imposes 240 billion Euros worth of taxes on energy, but those taxes are haphazard and vary widely by country, resulting in a patchwork of regulations that don't achieve any wider energy goals. Some countries such as Denmark, Sweden and Ireland have imposed a carbon tax, raising the price of electricity for most consumers, but recent attempts to do the same in France have failed in light of strong opposition from the farm sector. The draft EU plan, which was obtained by news agency Reuters, would replace this patchwork with a single unified carbon tax approach across all of Europe. Specifically, it would:

  • Tax all forms of energy, from coal to biodiesel, starting in 2013.
  • Impose a carbon tax, making coal-based electricity more expensive than renewables.
  • Shift taxation away from consumers to energy producers.
  • Significantly reduce carbon emissions within the EU.

The plan is to be unveiled and debated later this month. It's an audacious plan that faces a lot of headwind, but backers believe that it has a chance of success given the current debt crises in all of Europe. The appeal is that the carbon tax will raise billions of revenue for cash-strapped governments without raising income taxes on families and individuals. Of course, the energy producing companies will strongly oppose the plan and argue (probably correctly) that their higher costs will simply be passed on to consumers. Nonetheless, if passed, the plan would for the first time create a taxation structure that favors renewable electricity over coal-fired electricity in a major industrialized economy.

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