EU Efficiency Directive undermined by Member State accounting tricks

The beating heart of the EU’s Energy Efficiency Directive is its Article 7: the mandatory requirement for all Member States to achieve 1.5% energy savings every year.

In practice, this was watered down by a range of exemptions to just 0.7% per year in the 2014-2020 savings period, and a slightly better 0.8% in the 2021-2030 period (thanks to last year’s revision of the Directive).

But it turns out some countries have hit upon a loophole to weaken the goal even further. They do so by crediting ‘savings’ from tax measures. And they do this in a very disingenuous way. It all comes down to the difference between EU minimum tax levels and real tax levels in the Member States, which are often a lot higher.

Sweden, which pioneered the approach, estimates 1) the energy savings from its existing tax measures and 2) the savings if its tax levels were at the much lower EU minimum level – then credits the difference as ‘additional’ savings. In practice, of course, they are not additional. I have seen an official presentation which openly admits this is a hypothetical scenario: there is zero intention of ever reducing tax levels.

Sweden’s saving grace is that it has a range of other energy savings measures, which it does not credit in its calculations (though it is questionable how much these other measures deliver). But other countries are using tax savings as an undiluted accounting trick. In a new study, Stefan Scheuer from the Coalition for Energy Savings and Jan Rosenow from the Regulatory Assistance Project conclude that tax dodges could render the whole 2014-2020 savings period meaningless. It is part of the reason why the EU is veering off course and failing to meet its overall 20% by 2020 energy savings goal.

Fortunately, the revised version of the Directive introduces safeguards which could fix the problem. And the European Commission seems determined to take action. I went through the key sections in the revised Directive with a legal expert:

The new Annex V section 2(a) introduces powerful wording on the need for additionality: ‘Savings shall be shown to be additional to those that would have occurred in any event’

Annex V section 2(i) specifies that ‘the calculation of energy savings shall take into account the lifetime of the measures and the rate at which savings decline over time’

The underlined wording is new. The Commission apparently had in mind consumer information policies, which demonstrably lose impact over time. But the wording can apply equally well to the dwindling impacts of taxation. For example, Member States could credit X savings from a tax measure for the first year, but only X-1 for the second and X-2 for the third.

Annex V section 3(h) says ‘the activities of the participating party [...] are shown to be material to the achievement of the energy savings claimed’

This excellent language isn’t new – it is a reformulation of the old Annex V2(c) from the 2012 version of the Energy Efficiency Directive. But here is the crucial point: the old version did not apply to taxation. The revised Directive does.

There is also the Article 2(18) definition from the 2012 Directive. It is unchanged in the revised version but taken together with the new text becomes a lot more powerful: ‘’Policy measure’ means a regulatory, financial, fiscal [...] instrument formally established and implemented in a Member State [...] to provide and purchase energy services and to undertake other energy efficiency improvement measures’. If a government is merely counting paper tax savings, it is not undertaking any energy efficiency improvement measures per se - so Article 2(18) is an effective counter to wild-west tax measures being misused to meet energy savings requirements.

So the safeguards seem to add up. That said, the new wording does not ban Member States from using taxation. But there is now a toolbox of legal text to make it very hard to get away with paper savings - in the upcoming 2021-2030 period, at least.

What Member States need to remember is that this is not a game where legal experts try to outwit each other in their interpretation of the Energy Efficiency Directive. Behind the dry facts and numbers lies the real-world reality of unchecked greenhouse gas emissions, air pollution and energy poverty. That is what is at stake.

The views expressed in this column are those of the columnist and do not necessarily reflect the views of eceee or any of its members.