Fueling the Debate: Is the EU’s Energy Tax Exemption Regime For Aircrafts and Ships Truly Legal?

1.        Introduction

 In 2021, the European Fee sought to recast the Vitality Taxation Directive ( ‘ETD’) to place it consistent with the Inexperienced Deal targets. Below this Directive, Member States should exempt from taxation gasoline used for industrial air navigation in addition to for industrial waterborne navigation (together with fishing) inside EU waters (see Article 14(1)(b) and (c)). The ETD justifies this tax exemption regime by “current worldwide obligations and the sustaining of the aggressive place of Group corporations” (recital 23).

In its legislative proposal, the Fee instructed ending the tax exemption regime for intra-EU navigation, whereas making it non-compulsory for extra-EU navigation. It argued that “by way of the implementation of the polluter-pays precept”, the ETD “can contribute to the elevated ambition of not less than 55% discount in greenhouse fuel emissions by 2030 by making certain that the taxation of motor and heating fuels displays higher the impression they’ve on the atmosphere and on well being.” (Recital 3 of the proposal)

This proposal, nevertheless, is dealing with the opposition of varied Member States. Due to this fact, provided that it is a fiscal matter that requires unanimity in Council as per Article 113 TFEU, the established order is the most probably final result of the present negotiation course of that’s scheduled to finish with a vote within the ECOFIN Council in November 2025. Because it at present stands, the compromise brokered by the Danish presidency maintains the exemption regime not less than till 2035, solely topic to minor adjustments.

Because the negotiation course of is drawing to an in depth, environmental associations maintain advocating the top of the present exemption regime (see, for instance, right here and right here). Among the many arguments that they put ahead, two of them not directly problem the lawfulness of such a tax exoneration. In accordance with the primary argument, the present regime would give the aviation and transport sectors an unfair aggressive benefit over rail and different sustainable alternate options. Seen from a authorized angle, this declare raises the query of the compatibility of the present ETD with the state support prohibition laid down in Article 107 TFEU and with the overall precept of non-discrimination. It is going to be examined in part 2 under.  Below the second argument, the present exemption would fly within the face of the polluter-pays precept. This precept isn’t just a imprecise political goal. It’s enshrined in Article 191(2) TFEU and has been the topic of ample case-law. The deserves of this declare shall be addressed in part 3 under.  

2.        Compatibility of the tax exemption with the state support prohibition and the non-discrimination precept

The Basic Court docket has addressed the query whether or not a tax exemption for gasoline utilized by industrial aircrafts is suitable with the state support prohibition and the non-discrimination precept. In Deutsche Bahn, the German railway firm complained about the truth that the German laws offering for such an exemption launched a distortion of competitors between (high-speed) practice corporations and air transport corporations. Whereas the previous paid taxes on the power they used for transport, the latter didn’t. In accordance with Deutsche Bahn, this amounted to state support that’s incompatible with Article 107 TFEU and a breach of the non-discrimination precept.

In a five-judge ruling delivered practically 20 years in the past, the Basic Court docket rejected Deutsche Bahn’s declare. It held that the exemption at situation didn’t represent state support, because it was imposed on the Member States underneath Council Directive 92/81/EEC (later changed by the ETD). In different phrases, a subsidy couldn’t qualify as state support if it had been made obligatory underneath EU regulation. As regards an alleged breach of the non-discrimination precept, the Basic Court docket said that the distinction in remedy between trains and aircrafts was justified by the target of avoiding a distortion of competitors between Group-based airline corporations and third-country opponents as a result of “the worldwide follow of exempting aviation gasoline from excise duties, which is enshrined within the Chicago Conference and in worldwide agreements concluded between States” (Deutsche Bahn, para. 139).

20 years later, can the Basic Court docket’s ruling nonetheless be thought to be a legitimate precedent that will doom to failure any comparable problem of the exemption set forth within the ETD? I personally doubt it. There are believable grounds to contemplate that the reasoning of the Court docket has misplaced a few of its relevance and persuasiveness.    

First, opposite to Council Directive 92/81/EEC, which was relevant in that case, the ETD doesn’t include an absolute tax exemption obligation. In accordance with Article 14(2) ETD, not solely are Member States allowed to impose a taxation on home transport (say, on a Paris-Marseille flight), however they could additionally enter into bilateral agreements with different Member States in an effort to waive the exemption as regards travels between these two States (say, on a Lyon-Milan flight supplied there’s an settlement between France and Italy). Due to this fact, the argument that the tax exemption doesn’t qualify as state support as a result of it’s imposed by EU regulation is just not compelling as regards the ETD. Admittedly, the ETD continues to authorize such an exemption. Nevertheless, the truth that a preferential remedy is allowed for by an EU act doesn’t stop its characterization as state support (see Fee/Eire e.a. (paras 45-53)).

In fact, this doesn’t imply that any software of this tax exemption routinely quantities to an impermissible subsidy. State support regulation may be very fact-sensitive. As an illustration, this tax exemption may presumably solely be thought to be distorting competitors and affecting commerce between Member states on particular routes which are commercially vital and for which there’s substitutability between totally different modes of transport (akin to Lyon-Milan or Paris-Marseille, the place there’s real competitors between practice and airplane).

Moreover, in an effort to set up the selectiveness of the help, it must be demonstrated that the exemption doesn’t profit undertakings which are ‘in a comparable state of affairs within the mild of the target of the tax’ (Svenska Bankföreningen and Länsförsäkringar Financial institution / Fee (para. 118)). A ‘mere aggressive relationship’ is just not sufficient to that impact (Idem (para. 124)).

This brings us to the second limb of the Basic Court docket’s reasoning in accordance with which airline corporations are in a selected state of affairs in comparison with practice undertakings given ‘the worldwide follow of exempting aviation gasoline from excise duties which is enshrined within the Chicago Conference and in worldwide agreements concluded between States” (Deutsche Bahn, para. 139).

This argument is ambiguous and unconvincing. Whereas there could also be a global “follow” of exonerating airplane gasoline, no worldwide conference prohibits the taxation of gasoline for industrial aviation. Bilateral agreements to that impact (akin to Article 11(2) of the EU-US Open Skies Settlement) are usually based mostly on reciprocity, that means {that a} unilateral withdrawal of the exemption would merely launch the opposite social gathering from its corresponding obligation. Topic to very restricted exceptions, the identical applies to industrial transport.

In different phrases, the one legitimate motive put ahead by the Basic Court docket to justify a selected remedy of the aviation sector is the existence of a standard follow of treating it otherwise!  This can be a completely round reasoning that maintains a vicious circle hampering any try at altering the established order. The alleged must keep away from a distortion of competitors between EU and third-country corporations is predicated on a typical prisoner’s dilemma argument, one which traps all events in a suboptimal final result.

In any occasion, this argument loses its pressure if all corporations, no matter their nation of incorporation, are topic to gasoline taxation for purchases made inside EU territory, because the Fee proposes. Furthermore, the Fee’s proposal targets solely intra-EU transport, which additional weakens the declare that gasoline taxation would distort competitors. In any case, justifying one type of discrimination on the grounds of stopping one other quantities to poor authorized reasoning.

In view of the foregoing, the declare that the tax exemption on gasoline for industrial aircrafts and ships quantities to unlawful state support is just not with out advantage. It deserves additional scrutiny and may very well be a significant argument in assist of the Fee’s proposal to finish the present preferential remedy granted to air and waterborne navigation. Arguably, this declare have to be taken all of the extra significantly provided that, in accordance with the Court docket of Justice, state aids can’t be held suitable with EU regulation in the event that they infringe rules of EU environmental regulation such because the polluter-pays precept (Austria / Fee (paras 44-46 and 100)). As we’ll see within the subsequent part, there are good grounds to contemplate that the tax exemption is hardly suitable with that precept.

3.        Compatibility of the tax exemption with the polluter-pays precept

The polluter-pays precept was launched greater than 50 years in the past in EU regulation as that means that “[t]he value of stopping and eliminating nuisances should in precept be borne by the polluter”. In accordance with Article 193(2) TFEU, Union coverage on the atmosphere have to be based mostly on that precept, which has discovered its approach into a number of legislative acts.

As beforehand talked about, the Fee’s proposal to recast the ETD and get rid of the present exemption regime is explicitly grounded within the polluter-pays precept. However does this suggest that sustaining such a regime would entail a violation of that precept and will, due to this fact, be regarded illegal? Two objections may be raised to forestall an easy affirmative reply.

A.       The applicability of the polluter-pays precept

The primary one lies with the applicability of the polluter-pays precept. In accordance with the ECJ, this precept solely applies to environmental laws, i.e. to laws based mostly on Article 192 TFEU (UNESA (para 28 and case-law cited)). Insofar as it’s based mostly on Article 113 and (albeit subsidiarily) Article 192 TFEU, the Fee’s proposal to recast the ETD undoubtedly falls throughout the scope of the polluter-pays precept.

In contrast, each the present ETD and the compromise textual content ready by the Danish presidency point out Article 113 TFEU as their sole authorized foundation. May this distinction make the ETD (because it at present stands and within the model proposed by the Danish presidency) escape the polluter-pays precept?  

Arguably, such a conclusion sits uneasily with the environmental integration precept enshrined in EU main regulation. In accordance with such a precept, the EU should combine “environmental safety necessities” (Article 11 TFEU) and “a excessive degree of environmental safety” (Article 37 Constitution) in all its insurance policies. It must be added that, insofar as the reasons referring to Article 37 of the Constitution cross-refer to Article 191 TFEU, there’s little doubt that this “excessive degree of safety” customary consists of the polluter-pays precept.

Admittedly, pursuant to Article 52(5) of the Constitution, the precept set forth in Article 37 can solely be used to evaluation the legality of acts that search to implement it. Nevertheless, the preamble of the present ETD incorporates an specific reference to the environmental integration precept (recital 6). It additionally mentions that the taxation of power merchandise is among the devices out there for reaching the Kyoto Protocol targets (recital 7). There are due to this fact good grounds to contemplate that the ETD seeks to implement a ‘excessive degree of environmental safety’. 

This conclusion applies with much more pressure to the compromise model of the recast ETD as it’s at present mentioned.  The preamble of this textual content expressly refers back to the polluter-pays precept. It states that

“Vitality taxation can contribute to the Union’s ambition of not less than a 55% discount in internet greenhouse fuel emissions by 2030 in comparison with 1990, in addition to to the target of zero air pollution by way of the implementation of the precept ‘polluter pays’, by making certain that the taxation of motor fuels, heating fuels and electrical energy higher displays the impression these merchandise have on the atmosphere and on well being.”

To sum up, there’s a case to be made that each the present ETD and its newly negotiated model fall throughout the scope of the polluter-pays precept. Concluding in any other case would significantly undermine the effectiveness of the environmental integration clause.

B.       The margin of discretion within the implementation of the polluter-pays precept

The second situation pertains to the measure of discretion that the EU legislature enjoys within the implementation of this precept. It emerges from the ECJ’s case-law that this discretion operates at two ranges.

First, the EU lawmaker has some leeway concerning the selection of the means used to adjust to a precept or pursue an goal (see Afton (para. 28)). On this respect, it must be famous that the polluter-pays precept lies on the coronary heart of one other regulatory regime, particularly the emissions buying and selling scheme (‘ETS’). This scheme is predicated on a system of greenhouse fuel emission allowances which are capped and that may be traded between financial operators. One may argue that by together with aviation and transport actions within the ETS, the legislature merely selected one other path than gasoline taxation to implement the polluter-pays precept in these sectors. 

The issue with that declare is that it’s empirically flawed. In 2024, it seems that airways paid round 3 billion EUR whereas transport corporations disbursed roughly 2.4 billion EUR as a part of the ETS.  One ton of CO2 emissions underneath the ETS at present prices these corporations between 60 and 80 EUR whereas its actual, social value is estimated between 270 and 300 EUR. Primarily based on these figures, the ETS displays at finest a “polluter-pays-the-fourth-principle”! However even that’s an overstatement. The aviation sector retains benefiting from a considerable amount of free allowances whereas many industrial ships (together with fishing ships) usually are not even coated by the ETS. In abstract, because it at present stands, the ETS is manifestly incapable of complying with the polluter-pays precept, particularly of internalizing the environmental value related to industrial air and waterborne navigation.

The second degree of discretion loved by the EU’s political establishments refers back to the balancing between competing targets (see AG Medina’s opinion delivered on 19 June 2025 in LF (paras 96-97)). However what are the targets that would legitimately curb the applying of the polluter-pays precept on this case? As beforehand famous, it can’t be the necessity to respect worldwide regulation since no Treaty binding on the EU incorporates a basic prohibition of gasoline taxation for ships or plane. As for the target of avoiding distortions of competitors, it must be supported by onerous financial proof. At any price, it’s onerous to see how gasoline taxation on intra-EU transport (as instructed within the Fee’s proposal) would create a aggressive benefit for corporations situated in third-countries. Whether or not they’re included within the EU or elsewhere, the operators should buy gasoline in Europe (and can due to this fact should pay a tax) to hold out such transport providers. As a consequence, they are going to be handled in the identical approach.

4.        Conclusion

In view of the foregoing, the Council ought to suppose twice earlier than deciding to keep up the present tax exemption regime within the revised ETD. Such a establishment could not stand up to judicial scrutiny. First, nationwide exemptions regimes may be efficiently challenged by opponents on the bottom that they quantity to impermissible state support (though a selected, case-by-case evaluation can be vital to find out whether or not that is truly the case). Second, the related provisions of the ETD (whether or not in its present model or within the “compromise” model put ahead by the Danish presidency) may very well be held invalid on the bottom that they run in opposition to the polluter-pays precept. Admittedly, this stays speculative, as no EU laws has but been discovered to violate that precept. Nevertheless, the distinctive nature of the local weather disaster could immediate the CJEU to undertake an more and more assertive stance on this situation – exhibiting much less deference to regulatory selections that aren’t solely ill-suited to addressing local weather change, however that actively exacerbate it.

And the Fee’s function in all this? What choices does it have? In idea, it may withdraw its present proposal and introduce a brand new one, this time based totally on Article 192 TFEU. By shifting the authorized foundation, the Fee would get rid of the unanimity requirement within the Council, whereas signaling that the recast of the ETD displays a real change in coverage route – putting the struggle in opposition to local weather change on the forefront. However it’s a dangerous and extremely unlikely (eleventh hour) transfer, if just for authorized causes, because the ECJ made it clear that the Fee’s prerogative to withdraw a proposal is just not absolute and should adjust to the inter-institutional stability precept, but in addition as a result of outvoted Member States would fiercely problem the legality such a change in authorized foundation.

Because of this, it’s possible that the ultimate phrase on this matter will relaxation with the ECJ – a mirrored image of the enduring issue political authorities, each inside Europe and past, face in treating the local weather disaster with the seriousness it calls for.

 Antoine Bailleux is a professor of EU regulation and authorized idea at UCLouvain Saint-Louis Bruxelles (Brussels, Belgium). He at present is the Dean of the Institute for EU Research at that very same college. He’s additionally a practising lawyer and a member of the Brussels bar. His essential areas of educational curiosity are EU constitutional regulation, EU environmental regulation and post-growth authorized idea.