A draft law proposed by the European Commission that aims to cut greenhouse gas emissions and enhance energy efficiency by hiking fuel taxes and imposing an emissions levy on sectors currently outside the EU emissions trading scheme looks set to put Brussels on a collision course with the UK and Germany.

Both countries said they were likely to veto the proposed revision to the current Energy Taxation Directive (ETS), which outlines minimum rates of tax for transport and heating fuels as well as electricity.

The Commission said today that the Directive was “outdated and inconsistent” and failed to take account of the EU’s energy and climate change targets, including its goal to reduce carbon emissions by a fifth over the next decade.

The Commission has now published a draft revised Directive, which was partially leaked last month, that proposes splitting the minimum fuel tax rate into two separate levies based on the carbon dioxide (CO2) content and energy consumption characteristics of the fuel.

The first would see a single rate of €20 per tonne of CO2 introduced for all sectors not currently covered by the EU ETS, effectively providing a carbon price for households, transport, smaller businesses and agriculture from 2013. Significantly, renewable energy sources would be exempt from the levy.

The energy consumption levy would see fuels taxed based on the amount of energy they generate rather than volume. Under the proposals, the levy would start from €9.60 per gigajoule for motor fuels and €0.15 per gigajoule for heating fuels. This system, which would potentially come into force from 2023, effectively increases low tax rates on coal and diesel and rewards more energy efficient fuels.

Biofuels that are certified as meeting sustainability criteria would be exempt from the CO2 element under the proposals, reflecting their lower emissions and again providing an incentive for businesses and individuals to switch to greener fuels.

Both the carbon and energy consumption levies would then be combined to produce an overall rate of tax for fuel. Countries would be required to set tax equal to or above the EU’s minimum levels.

“A fair and transparent energy taxation is needed to reach our energy and climate targets,” said taxation commissioner Algirdas Šemeta at the launch of the draft directive.

“Our common goal is a more resource-efficient, greener and more competitive EU economy. This proposal sets a strong CO2 price signal for businesses and consumers. It is also an opportunity to shift the tax burden from labour to consumption in order to favour growth-enhancing taxation.”

Green campaign group Transport & Environment welcomed the measures, claiming that the average fuel tax in Europe has declined in real terms by €0.10 a litre since 1999. But the group remained critical of the Commission’s decision not to include shipping and aviation fuel in the proposed tax regime.

“If the EU really wants to cut transport emissions by 60 per cent by 2050, it is going to have to wake up to the fact that it can no longer let ships and planes operate in a tax-free parallel universe,” said Jos Dings, director of Transport & Environment. “If the EU cannot even end the ban on taxing these fuels, you have to wonder whether these headline targets are just empty promises.”

However, to become law the legislation needs to be backed by all EU members, each of which can veto the proposals.

The UK is a known opponent of increasing the EU’s taxation powers, while German chancellor Angela Merkel has also spoken out against the Directive, which would increase the cost of the country’s heavily subsidised diesel from €0.07 per litre to €0.75 in 2020.

A spokesman for the Treasury told BusinessGreen that the UK’s stance was unlikely to change, making the proposals highly unlikely to be ratified in their current form.

“The UK strongly opposes the European Commission’s proposals for a pan-European carbon tax,” he said. “Member states should have the flexibility to decide on the measures that will best help them meet their greenhouse gas emissions targets.”

MEP Jacqueline Foster, the Conservative transport spokesperson in the European Parliament, today warned that the UK would not support the proposals.

“The European Union will do nothing to improve its popularity by imposing tax increases on already sky-high motoring costs. We all want to reduce CO2 emissions from vehicles but it should be done by placing incentives on people, not by clobbering them,” she said in the European Parliament. “The UK government is right to suggest it will use its veto on these measures.”