High Energy Taxes Threaten Europe's Industrial Competitiveness

By Kate Abnett and Julia Payne

BRUSSELS (Reuters) – Governments aiming to support Europe's faltering industries should focus on alleviating high energy taxes that harm competitiveness, according to the head of Europe's electricity lobby.

The European Union is preparing a package of measures to support struggling industries, to be released early next year, as major manufacturers, including automakers and steel firms, warn of potential plant closures and mass job losses.

Leonhard Birnbaum, President of the industry group Eurelectric, highlights the challenges faced by Europe's energy-intensive industries, including a fragmented market compared to China and limited access to credit. He stresses that policymakers seeking immediate relief should remove costs unrelated to the industry's structure from energy prices.

Birnbaum, who also serves as the CEO of German utility E.ON, stated, "We appreciate that states always need more money, but if you really want to electrify then you can't have, for example, an over-proportional tax burden on electricity compared to the tax burden on gas."

“If we are serious about cost competitiveness, electrification, and decarbonization, we must act on this,” he asserted.

In 2023, EU industries faced power prices 2-3 times higher than those in the U.S., with taxes comprising an average of 23% of the retail electricity price paid by energy-intensive firms, according to Bruegel, a think tank.

However, many of these taxes are imposed by national governments and lie beyond the EU's jurisdiction. Discussions amongst EU countries to amend tax rules in favor of cleaner energy sources have stalled since 2021.

The EU is set to unveil a plan for affordable energy prices early next year. Nonetheless, with tax reforms delayed and recent EU power market reforms being executed by national governments, there are doubts about what else Brussels can provide.

An official from one EU country mentioned that tax reductions would offer only limited assistance and called for broader measures to enhance European industries' competitiveness against China. For instance, implementing EU rules that mandate public procurement for locally-made, green products could be beneficial.

"We have trade policy tools, we have competition policy tools… We need to see a larger context," the official stated.

Last month, wholesale power prices in Europe hit their highest levels in over a year but remain significantly lower than their 2022 peak, which was driven by the impact of Russia's invasion of Ukraine and its subsequent reduction in gas supplies to the EU.