European Standing Committee B
Wednesday 27 October 1999
[Mr. Jim Cunningham in the Chair]
Taxation of Energy Products
10.30 am
The Chairman: Before I call the Minister, I want to make it perfectly clear that the United Kingdom fuel escalator is not appropriate for debate this morning, and if anyone refers to it I shall rule them out of order. Secondly, I ask hon. Members to keep their questions to the Minister brief.
The Financial Secretary to the Treasury (Mr. Stephen Timms): Thank you, Mr. Cunningham. I am delighted to appear before the Committee today to discuss the proposal. This is my first appearance in Committee as Minister, although I was a member of the Committee for a time. I am particularly pleased to make my first appearance as Minister with you in the Chair, Mr. Cunningham, to protect and guide me through the morning. The recommendation for a debate on this topic was made by the Committee as long ago as the end of 1997, and I and my predecessors are most grateful for the patience shown by the Committee in the time between then and now. The Committee has received three, explanatory memoranda on the proposal: the first on 21 May 1997; a supplementary one on 10 December 1997; and most recently, another supplementary in preparation for this debate, which I submitted on 12 October.
Briefly, the background is this. The European Commission published the proposal for a directive in March 1997, following the failure of the Council over several years to agree on the proposal for a Community-wide carbon/energy tax. The energy products directive is designed to replace two existing directives on the structure and minimum rates of excise duties on mineral oils. It would subsume those two directives, with some welcome simplifications and generally higher minimum rates, into a larger structure incorporating also minimum levels of taxation on other energy products not currently subject to Community tax rules, including coal, gas and electricity.
The Commission's rationale for the proposal stresses its single market justification rather than environmental motives. The argument is broadly that common minimum rates on all energy products would remove a distortion between oils and other energy sources, and free member states to impose higher taxes on all energy products without fear of provoking tax-„induced fuel switching or distortion of firms' location decisions through competitive underbidding of tax rates on energy between member states. As a tax proposal, this directive is subject to unanimity and there is absolutely no question of our being forced to agree to anything which is contrary to the interests of the UK.
Although we have had some scepticism about the single market rationale for the Commission's proposal in relation to products that are not easily traded across borders, we have sympathy with the view of many other member states that there is a role for taxes on business use of energy if member states are to meet their legally binding targets for reducing greenhouse-gas emissions.
We have always made it clear that we would not under any circumstances accept an obligation to impose new taxes on domestic energy consumption. The strength of our position on that has been generally acknowledged, and both the Commission and several presidencies have agreed that some sort of exemption should be available for social policy reasons. We shall continue to press that point.
On industrial and commercial energy consumption, we reserved our position pending Lord Marshall's report ``Economic instruments and the business use of energy'', which we received late last year, and the decisions that are to be taken in light of that advice. The March Budget closely followed his recommendations when it announced the introduction of the climate change levy which, although neutral for business as a whole, will provide an incentive for a step change in the business use of energy. That has enabled the United Kingdom to take a more positive, although still qualified view on the draft directive.
The former Economic Secretary to the Treasury, my hon. Friend the Member for Leicester, West (Ms Hewitt), wrote to Commissioner Monti on 11 March alerting him to our Budget announcement and setting out in brief the new UK position. His response on 5 May made it clear that he was encouraged by that development. At the Economic and Finance Council on 15 March, the Economic Secretary set out the UK's new position on the directive. Commissioner Monti responded positively to that in his summing up when he said that domestic exemption would be ``a minor blip'' relative to the implementation of the rest of the directive.
Responding to that and developments in other member states, the German presidency tabled a paper for the ECOFIN meeting on 25 May, setting out where it thought the proposal would need to be amended to meet the concerns of member states. As its compromise did not command unanimous support, the Council concluded that further work should be undertaken in a working group and that another report should be made to ECOFIN in November. However, no more meetings have taken place, and the next ECOFIN meeting is scheduled for 8 November.
The Government's position on the directive is straightforward. We are strongly in favour of higher minimum rates on mineral oils, especially road fuels. Wide variations in rates do distort the proper operation of the single market, not only from the UK's point of view, but also from that of other member states that place a premium on the environment but which have lower taxing neighbours. We also welcome the ability to introduce differential rates of duty on road fuel for environmental reasons without having to apply, as we currently do, for a derogation. Committee members may recall the great success of the differential in favour of ultra-low sulphur diesel, which has resulted in almost 100 per cent. take up of the ultra low sulphur variant. We will no longer have to seek the agreement of other member states to what is and should be a matter for subsidiarity.
As for the taxation of coal, gas and electricity, we are prepared to see progress made on the draft directive, subject to the inclusion of a permanent exemption for domestic consumption of all energy products. We are encouraged by the work of the German presidency in particular and believe that our concerns can be met and that the UK will be able to continue to work constructively towards the resolution of this long-running issue.
The Chairman: I remind hon. Members that questions should be short. They will finish at 11.30 am and we shall then have the general debate.
Mr. Oliver Letwin (West Dorset): I welcome the Minister to his new role. He said that he was happy to be before the Committee, which I can hardly believe. However, I am glad that he is here.
On what date did the Government decide that their position in the previous explanatory memorandums was 100 per cent. wrong? Does the Minister believe that any aspects of industrial production should not, in principle, be subject to harmonised tax directives?
Mr. Timms: I thank the hon. Gentleman for his generous welcome, although he appears to have misunderstood the development of the Government's views on this subject. We were awaiting the advice that had been commissioned from Lord Marshall, who produced his report about a year ago, on whether economic instruments could help to achieve our Kyoto objectives. His advice—I think that I quote correctly—is that there ``probably was'' a role for such measures. That led to the Chancellor's proposals in the March Budget for the climate change levy. Since then, we have consulted the industry and others about the details of those proposals, and in due course the Chancellor will want to say more about exactly how they will work. We have thus been able further to refine our position on the directive and to be more content about the prospects for further progress on the measure before the Committee.
The attitude taken by the German presidency, and the reassurance that our worries about not adding to the taxation of domestic fuel could be allayed, was also helpful. As a result of those two developments, the Government can be relaxed about the prospect of further progress on the directive although, as I said earlier, the speed at which that progress will occur still seems unclear. We are getting close to the November ECOFIN meeting and little has occurred.
On the hon. Gentleman's second point, we are determined that existing derogations should be maintained where appropriate. We do not see any great dangers to the United Kingdom's position on industrial taxation posed by the directive as it stands, and as the prospects for it now appear.
Dr. Nick Palmer (Broxtowe): I, too, welcome my former Committee colleague to his present position, where he is an inspiration to us all.
In the run-up to the debate, there were suggestions that the directive, although not exactly a dead duck, is a duck in poor health. What are the positions of other European Union member states? Now that we feel more relaxed about it, is there a prospect of reasonable progress, even if it is a bit slower than one might wish, or is that unlikely?
Mr. Timms: I thank my hon. Friend for his generous remarks. It is difficult to be unequivocal about the prospects for progress; my hon. Friend is right to express concern about the health of the patient in this case. There are still some grave reservations among member states about the proposals. The position taken by the Spanish Government is particularly hostile to them. There is still the possibility of progress, although the signs are that it will not be rapid. However, if there were to be progress on raising the levels of duty on road fuels across Europe, the United Kingdom position, which was taken by this Government and the previous Government, is that it would be a welcome development. Quite how rapidly that progress will unfold is unclear at present.
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