**4. Promotion of biofuels in transport via tax incentives**

A large variety of biofuel support policies have been in place in MSs, ranging from command and control instruments such as standards and quotas, over economic and fiscal measures such as tax exemptions, to information diffusion5. However, from the early 90's of the past century there have been two main instruments which were the basis of biofuels supports schemes in EU: those were subsidization to compensate extra costs of biofuels compared to fossils fuels or prescription of a mandatory uptake in the market.

The first option has been usually implemented by tax exemptions schemes and the second one obliges fuel suppliers to achieve a certain biofuel share in their total sales. Any case, in practice both instruments can be used by national authorities of EU at the same time of others promotion measures.

We focus on tax incentives instruments oriented to promote the use of biofuels in transport. Sections develop above include tax incentives to also promote the biofuels use for green electricity generation and for H & C uses.

From Pelkmans *et al.* (2008) we can conclude that MSs strategies to reach the biofuels targets differ strongly from country to country. This is a result we observe also in the cases of green electricity and H &C exposed above. Some MSs have focused mainly in pure biofuels, while others have stimulated low blending from the beginning.

This section contains an actualized overview in which authors will mention the main tax incentives. It is not intended to give a comprehensive overview.

The use of tax exemptions to promote biofuels in EU is feasible under the conditions settled by the EU Energy Taxation Directive6. The most relevant conditions are:


But before the EU Energy Taxation Directive came into force, some MSs with a large agricultural sector introduced some tax incentives at the same time at the European Common Agricultural Policy (CAP) reform of 1992. Those were the cases of Germany and France7. The fact of having a large agricultural sector with a long tradition and social influence motive those MSs to stimulate the production and use of biofuels. Next, environmental protection was also added as an additional and significant driving force.

The cases of Germany and France were followed in the following years by others MSs as the same time the EU area were expanded. In fact, some MSs add tax incentives to promote biofuels with direct subsidies to farmers who produce feedstock for biofuels uses (i.e. France, Bulgaria, Slovenia, Latvia, Lithuania, Poland and Czech Republic).

<sup>5</sup> Wiesenthal *et al*. (2009) give information about these complementary policies and measures: support to the cultivations of agricultural feedstock production in the framework of the Common Agricultural Policy, capital investment support to biofuel production facilities and biofuel standards to estimulate the wide market introduction of biofuels.

<sup>6</sup> Council Directive 2003/96/EC of 27 October restructuring the Community framework for the taxation of energy products and electricity.

<sup>7</sup> Eastern countries like the Czech Republic also introduced tax exemptions in theses years although wasn´t an EU MSs in 1992.

A large variety of biofuel support policies have been in place in MSs, ranging from command and control instruments such as standards and quotas, over economic and fiscal measures such as tax exemptions, to information diffusion5. However, from the early 90's of the past century there have been two main instruments which were the basis of biofuels supports schemes in EU: those were subsidization to compensate extra costs of biofuels

The first option has been usually implemented by tax exemptions schemes and the second one obliges fuel suppliers to achieve a certain biofuel share in their total sales. Any case, in practice both instruments can be used by national authorities of EU at the same time of

We focus on tax incentives instruments oriented to promote the use of biofuels in transport. Sections develop above include tax incentives to also promote the biofuels use for green

From Pelkmans *et al.* (2008) we can conclude that MSs strategies to reach the biofuels targets differ strongly from country to country. This is a result we observe also in the cases of green electricity and H &C exposed above. Some MSs have focused mainly in pure biofuels, while

This section contains an actualized overview in which authors will mention the main tax

The use of tax exemptions to promote biofuels in EU is feasible under the conditions settled



But before the EU Energy Taxation Directive came into force, some MSs with a large agricultural sector introduced some tax incentives at the same time at the European Common Agricultural Policy (CAP) reform of 1992. Those were the cases of Germany and France7. The fact of having a large agricultural sector with a long tradition and social influence motive those MSs to stimulate the production and use of biofuels. Next, environmental protection was also added as an additional and significant driving force. The cases of Germany and France were followed in the following years by others MSs as the same time the EU area were expanded. In fact, some MSs add tax incentives to promote biofuels with direct subsidies to farmers who produce feedstock for biofuels uses (i.e.

 Wiesenthal *et al*. (2009) give information about these complementary policies and measures: support to the cultivations of agricultural feedstock production in the framework of the Common Agricultural Policy, capital investment support to biofuel production facilities and biofuel standards to estimulate

Council Directive 2003/96/EC of 27 October restructuring the Community framework for the taxation

Eastern countries like the Czech Republic also introduced tax exemptions in theses years although

compared to fossils fuels or prescription of a mandatory uptake in the market.

**4. Promotion of biofuels in transport via tax incentives** 

others promotion measures.

electricity generation and for H & C uses.

volume of renewable used.

the wide market introduction of biofuels.

of energy products and electricity.

wasn´t an EU MSs in 1992.

 5

6

7

six consecutive years, renewable.

others have stimulated low blending from the beginning.

incentives. It is not intended to give a comprehensive overview.

by the EU Energy Taxation Directive6. The most relevant conditions are:

France, Bulgaria, Slovenia, Latvia, Lithuania, Poland and Czech Republic).

A correct overview of tax measures to support biofuels in transport must divide incentives into three main groups. Firstly tax incentive measures have been implemented as tax exemptions included in national mineral oil tax. Secondly, others taxes on GHG emissions have been also used to implemented these types of measures. Thirdly, some incentives were introduced to reduce taxation on ecological cars and biofuel industry.

Related with the first group of measures and following Pelkmans *et al.* (2008), since 1993 until 2003, the German fiscal authority determined that pure biofuels were exempted from the national mineral oil tax although mixed biofuel components fall under full taxation like traditional fossil fuels. However, an amendment of the Mineral Oil Tax Act up to 2004 established that not only pure biofuels, but also mixed biofuels were exempted from the excise tax on mineral oils in proportion to the amount of biofuel that they contain. In 2006 the government switched from the tax exemption policy to obligation schemes. The Netherlands authorities have followed a similar path.

Since 1991 pure biodiesel enjoys a full tax exemption in the Austria's mineral tax and since 2007 there is a tax reduction also for gasoline blended with bioethanol. Tax exemption for ethanol is also allowed in Sweden since 1992 but for all of biofuels full tax exemption is only permit for pilot projects since 1995.

The France incentive system is particularly conductive to the development of biofuels. Since 1992 biodiesel enjoys a total exemption from the internal tax on petroleum products (TIPP). In the case of bioethanol incorporated as ETBE in gasoline the exemption is a partial one (80 %). An interesting tax reform was implemented in France up to 2005. In order to raise the share of biofuels in the market, the French Parliament introduced a general tax on polluting activities (TGAP) for fuel resellers. TGAP is zero if an annual target percentage biofuels is reached8.

Joint with France, the Spanish incentive system is particularly conductive to the development of biofuels as they enjoy total exemption from the hydrocarbons tax until 31 December 2012. This special rate is applied to the biofuel volume contained in the mixture.

In 1992 Czech Republic established a zero excessive duty on produced biodiesel. This incentive was valid until 2007 when national government decided to change to a compulsory system (mandatory quotas). Different form Czech Republic, the Poland government maintains the tax exemption introduced in 1993. Incentives also remain valid in the United Kingdom where a duty incentive of 0.30 euro per liter for biodiesel is allowed since July 2002 and for bioethanol since January 2005. Incentives also remain valid in Lithuania (since 2005).

Over the past 4 years, a number of MSs have moved towards obligation or mixed systems to lower the revenue losses. Belgium is a significant case of mixed system where since 2006 exist a quota system for biodiesel (2007 for bioethanol) with tax reduction.

If we considered now taxes on GHG emissions –the second group of tax incentives-, since 2002 CO2 neutral fuels are exempted from the Sweden CO2 tax. This is also the case of Denmark.

<sup>8</sup> A similar scheme was introduced in Germany since 2006 when the government switched from the tax exemption policy to obligation schemes. Then the Germany authorities introduced penalties in case of non-compliance the annual targets for biofuels consumptions. Penalties for non-compliance were been set rather high (> 0.50 euros/litre). As Pelkmans *et al.* (2008) pointed out this gave a good motivation for fuel distributors to fulfil the obligation.

Taxes Incentives to Promote Res Deployment: The Eu-27 Case 117

As tax exemptions provoke the losses in revenues for governments, it is interesting the case of Belgium. In this country and to overcoming the revenue losses, authorities promoted a simultaneous increase in the fossil fuel tax so as to render the policy budget-

The use of tax exemptions to promote biofuel has and additional advantage. As Wiesenthal *et al.* (2009) pointed out; the increasing number of available production pathways with different characteristics in term of GHG emissions, production costs and potentials implies that MSs may employ differentiated biofuel strategies, favoring specific types of biofuels in

However, the use of tax exemptions provokes a revenue loss. This explains that in the last

Proliferation of RES is a political question. Many measures can be implemented for it. Among them, tax incentives have been used to promote green electricity, RES for H&C and biofuels. Table 4 summaries these tax measures. This Table also shows the electricity generated from renewable sources as a percentage of gross electricity consumption, the combined heat and power generation as a percentage of gross electricity generation and the share of renewable energy in fuel consumption of transport in 2006 and the incremental

In general, countries that show high percentages also are those that have implemented tax incentives. However, these data do not allow us to assess specifically the effects of tax incentives as they are not isolated actions but in general all countries use a mix of measures to advance the development of RES. Among these measures, the fiscal measures, the others economic measures and the non economic measures such as advertising campaigns are some of them. Among the economic measures should be highlighted feed in tariffs and financial incentives. Among the non-financial measures include the regulation especially important for buildings and fuel. Therefore, besides presenting the data in Table 4, the

After analyzing the energy policies of EU-27 MSs, it can be pointed out that the main tax incentive used to promote green electricity by the MSs is the exemption from the payments of excises duties for electricity when the electricity is generated by RES (Germany, Romania, Slovak Republic, Denmark, Sweden, Poland and Finland). This measure has been basically used for reducing the higher prices of production of this type of energy. With the same aim, tax incentives in CCL are implemented in the United Kingdom, a reduction of the ecotax is implemented in Netherlands and some subsidies are used in Finland to offset the excise duty on electricity. Also, lower tax rates in VAT are applied in three MSs, France, Italy and Portugal. Fiscal incentives in direct tax are applied in personal income tax, corporate tax and in property tax. In direct taxes, Belgium and France have designed these incentives as a deduction on the taxable income, which is calculated as a percentage of investment cost of system installed. While Czech Republic has designed it as a tax exemption of the taxpayers income that come from generate green electricity and Luxembourg as a tax exemption to electricity producers that produce electricity exclusively for their own use. The corporate tax incentives consist mainly in a deduction of the profit obtained (Belgium, Greece and Spain), but in Czech Republic, it consist in a tax exemption of the income obtained from generating green electricity. Finally, it can be

order to better serve the objectives underlying their biofuel support policy.

specific effects of the measures in each country are discussed below.

said that only Spain and Italy uses fiscal incentives in terms of a tax exemption.

**5. Political discussion and main conclusions** 

years it is observed a switch from these types of measures to obligation schemes.

neutral.

points in 2006-2008.

Finally, a third group of tax incentives involves a heterogeneous set of measures oriented to promote industrial activities (biofuels production and the installation of points of sales for biofuels in traditional gas stations) or to promote ecological cars.

Many MSs as Germany have implemented tax incentive in the corporate tax to biofuels industry and to firms with projects related with biofuels.

Flexible Fuel Vehicles (FFV) have also enjoyed tax incentive in some MSs. In 2007, Spain implemented a reduction in the tax on matriculation of vehicles (Cansino and Ordoñez, 2008). This tax exemption is a total one in Ireland and in the case of electrical cars.

Table 3 summarizes our analysis and gives an overview of the MSs which have implemented tax incentives to promote biofuels in the last years.


Source: Pelkmans *et al*. (2008)

Table 3. EU MSs and tax incentives

Finally, a third group of tax incentives involves a heterogeneous set of measures oriented to promote industrial activities (biofuels production and the installation of points of sales for

Many MSs as Germany have implemented tax incentive in the corporate tax to biofuels

Flexible Fuel Vehicles (FFV) have also enjoyed tax incentive in some MSs. In 2007, Spain implemented a reduction in the tax on matriculation of vehicles (Cansino and Ordoñez,

Table 3 summarizes our analysis and gives an overview of the MSs which have

**Low ethanol blends (E5/ETBE)** 

**E85 PPO** 

2008). This tax exemption is a total one in Ireland and in the case of electrical cars.

**B30 B100** 

**Austria Belgium** 

**Germany** 

**Ireland** 

**Latvia** 

**Luxembourg** 

**Netherlands** 

**Bulgaria Cyprus** 

**Denmark Estonia** 

**France** 

**Hungary** 

**Lithuania** 

**Poland** 

**Romania Slovakia Slovenia Spain Sweden UK** 

biofuels in traditional gas stations) or to promote ecological cars.

implemented tax incentives to promote biofuels in the last years.

industry and to firms with projects related with biofuels.

**Low biodiesel blends (B5)**

**Czech Rep.** 

**Italy** 

**Greece** 

**Malta** 

**Portugal** 

Source: Pelkmans *et al*. (2008)

Table 3. EU MSs and tax incentives

**Finland** 

**The** 

As tax exemptions provoke the losses in revenues for governments, it is interesting the case of Belgium. In this country and to overcoming the revenue losses, authorities promoted a simultaneous increase in the fossil fuel tax so as to render the policy budgetneutral.

The use of tax exemptions to promote biofuel has and additional advantage. As Wiesenthal *et al.* (2009) pointed out; the increasing number of available production pathways with different characteristics in term of GHG emissions, production costs and potentials implies that MSs may employ differentiated biofuel strategies, favoring specific types of biofuels in order to better serve the objectives underlying their biofuel support policy.

However, the use of tax exemptions provokes a revenue loss. This explains that in the last years it is observed a switch from these types of measures to obligation schemes.
