Energy Taxes: A Comparison of Their Levying in Developing and Developed Countries

Chantel Akinyi Addero
Chantel Akinyi Addero
Tax Advisor, Andersen Kenya

A recent study by the OECD estimates that the effects of the COVID-19 pandemic could reverse decades of progress in sustainable development and the fight against poverty by magnifying the financing gap to achieve the Sustainable Development Goals (SDGs) in developing countries, which could increase by 70% compared to pre-COVID levels.

Energy taxes can be defined as a tax on fuels, energy generation, transmission, or consumption. They are emerging as an important tool for governments to promote sustainable energy consumption while generating revenue for public spending. Per the OECD, energy taxes and subsidy reform is instrumental to achieving the triple objectives of decarbonization, domestic revenue mobilization, and access to affordable energy. They are often implemented differently in first-world countries compared to third-world countries, perhaps due to levels of development and availability of resources.

Developed countries often have more robust energy tax systems in place compared to developing countries. They typically tax energy use at higher rates and have more extensive coverage of different types of energy consumption. The European Union (EU) is one of the regions with the most extensive energy tax systems globally. A minimum tax rate of excise duty of €0.36 per litre, or $1.55 per gallon, on petrol and diesel is imposed across the region, which member states can increase. According to the Tax Foundation, only Bulgaria, Hungary, and Poland have stuck to the minimum rate, with the rest of the countries in the region opting to levy higher rates. The taxes fund various public expenditures, such as healthcare, education, and infrastructure.

Another example is the United States, which has a complex energy tax system that varies between states. Federal taxes apply to petrol, diesel, and natural gas. Additionally, state taxes are often applied to energy use, with some states having higher taxes than others. The revenue generated from energy taxes in the United States is often used to fund transportation infrastructure and public services.

Developing countries tend to have weaker energy tax systems than developed countries due to several reasons, including lower levels of economic development, lack of infrastructure, and weaker governance systems. In many cases, third-world countries rely on natural resources, such as oil and gas, to generate revenue, which limits the need for energy taxes.

In Kenya, for example, the government has implemented several energy taxes to promote sustainable energy consumption and raise revenue for public expenditure. The main energy tax in Kenya is the excise duty on petroleum products, applied to petrol, diesel, and kerosene at a rate of KES 18.05 per litre, KES 12.12 per litre, and KES 7.89 per litre, respectively. The revenue generated from the tax is used to fund various public expenditures, such as infrastructure, health, and education.

The Nigerian government has implemented several energy taxes to promote sustainable energy consumption and raise revenue for public expenditure. Being among the top oil producers in the world, the main energy tax in Nigeria is the petroleum profit tax (PPT), which is applied to oil companies’ profits at a rate of 85%, with an additional 50% tax applied to offshore operations. The revenue generated from the tax is used to fund the provision of public goods for its citizenry.

South Africa is another country that has gone the taxation way to promote sustainable energy consumption and raise revenue for public expenditure. The primary energy tax in South Africa is the fuel levy, which is applied to petrol and diesel at R 5.38 ($0.29) and R 5.44 ($.030) per litre, respectively. The revenue generated from the tax is used to fund public expenditure such as healthcare provision, infrastructural development, and public education.

The main difference between first-developed and developing nations’ energy taxes is the rate at which they are applied. Developed nations often have higher tax rates on energy consumption, which promotes sustainable energy use and generates more revenue for public expenditure. Developing nations tend to have lower tax rates on energy consumption.

Advantages of Levying Energy Taxes

Energy taxation has proven to be advantageous in encouraging individuals and companies to use energy more efficiently by increasing the cost of energy consumption. Higher taxes on carbon-intensive fuels, such as coal and gasoline, incentivize the use of renewable energy sources, such as wind and solar power, which are more sustainable and environmentally friendly. Norway is an example of a country that has successfully used energy taxes to promote sustainable energy consumption. In 1991, Norway introduced a carbon tax on fossil fuels, which has incentivized the use of renewable energy sources. Today, over 95% of Norway’s electricity comes from renewable sources such as hydropower, wind, and solar.

Like all other taxes, energy taxes can generate significant revenue for governments to fund various public expenditures, such as healthcare, education, infrastructure, and environmental programs. This can reduce the government’s reliance on other sources of revenue, such as income and sales taxes. The United Kingdom is one such country where this may ring true. Energy taxes such as the Climate Change Levy and the Carbon Price Floor generate significant revenue for the government to fund various public expenditures, such as healthcare, education, and environmental programs. In 2020, the UK government announced that it would increase the carbon price floor to £18.08 ($21.6) per tonne of Carbon Dioxide, which is expected to generate £1.4 billion ($1.673 billion) in additional revenue in the 2022-23 financial year.

Energy taxes can also be used to incentivize the development and adoption of new technologies that reduce energy consumption and greenhouse gas emissions. Higher taxes on fossil fuels can spur the development of cleaner and more efficient technologies, such as electric vehicles and renewable energy sources. In the United States, California is an example of a state that has successfully incentivized technological innovation through energy taxes. California’s cap-and-trade program, which imposes a price on carbon emissions, has helped spur the development of new technologies such as electric vehicles, battery storage, and renewable energy sources.

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Energy Taxation: A Bed of Roses?

While we can see the benefits of energy taxes on an economy, it is not lost on us that every coin has two sides. One significant disadvantage of levying energy taxes is their somewhat regressive nature. It can be noted that they disproportionately impact low-income households, which spend a higher percentage of their income on energy consumption and can increase the financial burden on vulnerable populations and exacerbate income inequality. In India, for example, the government levies a tax on gasoline and diesel to raise revenue for infrastructure and other public expenditures. However, this tax disproportionately affects low-income households, who spend a more significant percentage of their income on transportation. To mitigate this, the government has introduced exemptions for certain categories of users, such as farmers and public transport providers.

A further example of the effects of the regressive nature of energy taxes is the 2018 protests in France following the government’s attempts to increase taxes on diesel to reduce greenhouse gas emissions by the “yellow vest” movement, which argued that the tax increase would lead to higher prices for goods and services and hurt low-income households. The protests forced the government to abandon the tax increase and rethink its climate policies.

Another disadvantage is the negative economic impact in the form of an increase in the cost of goods and services that rely on energy, such as transportation and manufacturing, leading to higher consumer prices. This can reduce consumer spending and slow economic growth.

In terms of economic impact, higher energy taxes in one country can make domestic companies less competitive on the global market compared to companies in countries with lower energy taxes, which can lead to reduced economic growth and job loss in the affected industries. In Germany, energy-intensive industries such as steel and cement have expressed concern that higher energy taxes will make them less competitive compared to companies in countries with lower energy taxes. To address this, the German government has introduced exemptions and discounts for certain industries to reduce their energy costs.

Overall, energy taxes can have both positive and negative impacts, and policymakers must carefully consider these tradeoffs when designing and implementing energy tax policies.

The Rise of Energy Taxes

Based on emerging world trends, it is likely that we will see an increase in the levying of energy taxes globally.

One of the main drivers of this trend is the urgent need to reduce greenhouse gas emissions and address climate change. Many countries have committed to ambitious targets to reduce their emissions, and energy taxes are one of the tools that governments can use to incentivize the transition to a low-carbon economy. For example, the European Union has recently introduced a carbon border tax that will impose a levy on imports of goods from countries with lower environmental standards.

Another factor driving the uptake of energy taxes is the need to generate revenue for public expenditure. Many governments around the world are facing budget deficits and are looking for ways to raise revenue without increasing income or sales taxes. Energy taxes provide a potential source of revenue that can be used to fund public services, infrastructure, and environmental programs.

Moreover, the development and deployment of new technologies that reduce the cost of renewable energy is making it easier for governments to implement energy taxes without causing undue economic harm. In many cases, energy taxes can be structured to incentivize the adoption of new technologies and promote sustainable economic growth.

Despite these trends, it is important to note that the implementation of energy taxes can be politically challenging. As mentioned earlier, energy taxes can be regressive and disproportionately impact low-income households. Governments must take steps to mitigate these impacts and ensure that the burden of taxation is distributed fairly.

In conclusion, the trend towards the levying of energy taxes is likely to continue as countries look for ways to reduce emissions and generate revenue for public expenditure. However, policymakers must be mindful of the potential negative impacts of energy taxes and take steps to mitigate these impacts while promoting sustainable economic growth.