Energy Taxes and Lobbying Against Free Trade

Samir Luther || CC

A government which robs Peter to pay Paul

can always depend on the support of Paul.

George Bernard Shaw (1944)

In March 2018, the European Commission opened an inter-governmental and public consultation on the Energy Tax Directive 2003/96 (ETD). The consultation period ended last week, on June 4, 2018.

Officially, the objective was “to gather factual information, data, knowledge and perception about the application of the Energy Taxation Directive in order to identify whether the current levels of taxation applied to motor fuels, heating fuels and electricity in accordance with the different provisions of the Directive, are still fit for purpose, in particular to ensure the proper functioning of the internal market”.

In other words, the Commission takes it for granted that ETD used to provide the framework for such functioning but some evidence is needed.

In the meantime, the situation in the power market has really changed, for reasons that have little to do with taxation or ETD itself:

  • In early 2007, the Commission communicated “Renewable Energy Roadmap — Renewable energies in the 21st century: building a more sustainable future”, setting targets of 20% renewable energy sources (RES) from overall energy use (and 10 % RES target in transport).

  • The 2008-2009 recession, combined with regulated preferential prices and technological advances in wind turbines and photovoltaic cells had produced a set of unintended consequences: a false economy (hopeful profiteers from subsidized RES prices had resulted in costs for consumers and some member states’ economies)1 and/or opportunities for interest groups and even mafiosi to milk the green energy boom.

  • Irrespectively of these developments, in early 2009, the EU enforced the Renewable Energy Directive 2009/28, to reiterate the abovementioned targets and promote clean diesel and biofuels (among other RES).

  • These amendments are justified by climate change targets and related policies, although it is not entirely clear to what extent had the current use of RES, and of clean diesel in particular, actually contributed to the decline of Green House Gasses. Other considerations, like energy efficiency, “jobs-and-growth”, “sustainable development”, and “circular economy”, are often referred to as well.

  • The so-called Third Energy Package (TEP), enforced in September 2009 and aiming at further liberalization of the EU gas and electricity markets as well as separation of companies’ generation and sales from transmission companies and networks (securing third party access), was implemented with uneven success by the member states.

  • This was particularly clear in the countries dependent (the “New Europe” member states) on energy resource imports from Russia, where the state-owned GASPROM has been often abusing its dominant position for non-market and preferential political treatment. After about two years of investigation and disputes, the settlement was finally reached on May 25.

These developments have proceeded in two opposite directions: TEP required member states to liberalize the power markets while RED set incentives to pick-up champions. The call for opinion on the ETD intends, presumably, to boost EU common market, while the RED and other policies are fragmenting it. Environmental promises might be financed by some tax revenue. This is, perhaps, the main reason why ETD has been of little use, “redundant or even harmful”, as a group of respectful new Europe think tanks has recently argued in response to Commission’s call to annul the Directive.

In this respect, since April 2017, the RED draft amendments invite groups that would benefit from higher targets of RES use and related subsidies to directly lobby in favor of the own interest. It is actually happening as we speak: interested parties from Visegrad Four and Lithuania, Latvia, and Bulgaria declared in mid-May they wish for a “stable biofuels policy to fight climate change”.

Energy Subsidies and Free Trade

The petitioners see “stable markets for bio fuels” as a) continued and strengthened targets of RES use in bio fuels, b) more subsidies for crop-based bio fuels (since they are the ones that produce them); otherwise, as the threat goes, “no new investment”, and c) the crop-based bio fuels are, presumably, the only “environment-friendly” additives to diesel, for instance, while palm oil additive is not”; therefore, the “complete ban on palm oil use” is the solution. Accidentally, the crop-based bio fuels may be produced in Europe and elsewhere, palm oil for bio fuels – in the countries around the Equator.

As noted, the debate on RED precedes the consultations on ETD and ignores the TEP (i.e. does not take into account the plans to liberalize and make the EU energy market more competitive).

The idea to increase crop-based and deal away with palm-oil additives was first aired last year by European MPs, namely by a Czech rapporteur, Mrs Katerina Konecna of the European United Left/Nordic Green Left. More than 600 MPs supported the motion.

At first, this motion was justified by a brief draft study on deforestation (of June 2017), procured by the Commission, then by a complete version of the same study in January 2018, and finally, in February–April, by a more balanced new report with a focus on economic effects in the form of Study on the environmental impact of palm oil consumption and on existing sustainability standards (commissioned by the DG Environment). This one was tabled at the European Council, the Commission, and the Parliament in April this year. The total volume of these reports is about 730 pages, of the parliamentary hearing – 250 pages.

Historical Background

The logging of rain forests in today palm-oil exporting countries (the combined sales of Malaysia, Indonesia, and Thailand amount to some 90% of the total) started at the beginning of the 20th century when trees were cleared for rubber plantations, then for mining and resettlement of poor households (in the 1950s and the 1960s), and it went on until 1980. After 1980, the production of palm oil recovered, an event that was hailed as a “global cornerstone”, the hallmark of “progressive and long-term development of human society”.

Ten years ago, Malaysia adopted a Forest Management Plan to increase the acreage of protected forest by 5% by 2017. According to a World Bank report of November 2017, “despite the complex legal and institutional structure, Malaysia is a success story in delivering efficient land administration services”. WWF Malaysia admits that rain forest in the country covers almost 60% of the country’s territory, but states it is not enough.

It seems that there is little progress in land and forest user rights in Indonesia, but as recently as in the fall of 2015, a private this tank in Jakarta, Center for Indonesian Policy Studies, proposed that deforestation can be dealt with strengthening communal and private property rights.

If one summarizes these documents and the available information on palm oil production and sales for bio fuels, the following regularities and effects seem obvious:

  • The palm-oil sales picked up as the demand was supported by regulation like RED (but not only) in 2009, but not for long;

  • The prices of palm-oil and other “clean” additives are correlated with business cycles and the use of diesel in general;

  • Presumably, the production has supported about 1.2 mln farmers around the globe, who are likely to be severely discriminated by the ban.

It would be no accident if MEPs then will complain about “global inequality” and propose relief programs for the affected countries.

More importantly, however, the ban violates at least three of the five WTO principles, those of Non-discrimination, Reciprocity, and of Binding and enforceable commitments (which requires multilateral trade negotiations). The EU, if the amendments to RED are adopted and the ETD is retained in its current shape, will set an example of discretization of already a difficult to maintain balance of global trade rules.

1 Citigroup Global Markets, Pan European Utilities: The € 1,000,000,000,000 (trillion) Decade, Citigroup, 22 October 2009, p. 3-4.