A poor model – the energy tax directive proposed by the EU would be a poison to Finland’s competitiveness

Based on a report or roadmap prepared by VTT for the Ministry of Finance, the current tax model for energy taxation works relatively well. The study, published on Wednesday, assessed the effectiveness of current energy taxation in various development paths in relation to emissions trading and other instruments.

The problem with the current tax model for the state economy is that the tax collection according to the model will decrease by almost 300 million euros by 2025 and will be about half a billion euros lower in 2035 than in 2017. Tax revenue will be reduced by declining fossil fuel use and increasing electricity use.

The reduction corresponds to about 30 percent of total energy tax revenue when traffic taxes are not taken into account.

The main factors driving the change in the energy system are the sharp rise in the price of emission rights, the rise in the price of fossil fuels and the resulting reduction in the use of peat and fossil fuels.

There is also a ban on the use of coal for energy in 2029, although current market developments are leading to a faster-than-expected phase-out of coal.

As a result of these factors, the energy system is evolving in a zero-emission direction, which, however, is a problem for the current public tax system, as noted above.

The goals of the EU’s 55 stand-by package (Fit for 55) still rose in the study of the stick beak. They aim to reduce the EU’s greenhouse gas emissions by 55% by 2030. VTT’s study assessed the effects of the proposed Energy Tax Directive (EVDe-1) included in the contingency package compared to Finland’s current energy taxation and a few alternative models.

All fuels for tax

The Commission’s proposal for a directive contains significant weaknesses in the competitiveness of industry, but at the same time the Commission’s model would bring significantly more tax revenue to public finances than other tax models. Of course, on the assumption that even after taxation, companies would remain competitive.

The Commission’s proposal would allow only one tax category for electricity, and the level of taxation on electricity would be the minimum for fuel taxes. Tax revenues rose sharply in modeling if the higher category of electricity taxation were used as the basis for taxation.

According to VTT researchers, allowing only one tax class for electricity and linking electricity and fuel tax levels will make the proposal more rigid than the current tax model.

The study examined the effects of the EVDe tax model with energy system model calculations in two ways: Using either the current level of electricity tax class I or II as the basic level of the tax.

The result is clear: the high level of taxation on electricity is hitting the competitiveness of energy-intensive industries hard, and the low level of taxation is making a deep dent in tax collection.

Rigidity, on the other hand, reduces the scope for targeting taxation specifically to disadvantages.

Revenues would be increased if the proposed directive included all fuels, including solid wood fuels, in the scope of energy taxation – in effect, the tax base would be extended to forest chips. Fuels would be divided into three tax level categories based on environmental criteria. In this category, fuels would be taxed uniformly according to their energy content.

In practice, this would mean a deterioration in the competitiveness of the industry. VTT estimates that industrial costs will increase by more than five per cent by 2025, compared to the current model of taxation. The Commission model would be the most expensive option throughout the period up to 2040.

Commission proposal upwind

It is still open when and in what form the Commission’s Energy Tax Directive will come. Ministry of Finance Terhi Järvikareen Member States disagree with the proposal and the directive is now being prepared slowly. Everything is therefore still open.

However, based on the calculated impact assessments performed by VTT, it is clear that none of the tax models examined was better than the current model at all tax levels in terms of all evaluation criteria.

Finland’s energy tax levels are already generally high, so managing the effects of their possible level purchases requires further studies, according to the Ministry.

By Editor

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