Negative Social Effects of Energy Taxes in the EU

The EU member states have implemented excise duties on fuel and electricity according to the EU Energy Tax Directive. The purpose of these measures is to motivate a reduction in energy consumption by internalizing external costs of energy. The taxes on energy have success in inciting energy savings. Simultaneously, the price levels of energy in the EU member states have increased to levels significantly higher compared to other countries in the region and the world. The price increase is the result of a cumulative effect of excise duties and other taxes and mechanisms including feed-in tariffs and quota policies. While the Energy Tax Directive gives the member states a level of freedom in setting the exact duty rates, the minimal rates enforced on all member states are relatively high. The policy intends to limit competition between the states on low energy prices and arbitrage trading between countries. We examine the purchasing power for energy products relative to the per capita GDP for a wide set of countries countries within the EU and in the rest of the world. We can identify several groups or clusters of countries based on their GDP per capita and energy prices. The new member states of the EU face a unique combination of low or moderate GDP per capita and very high energy prices. Their relative purchasing power for energy is degraded to levels comparable or lower than the purchasing power in developing countries with significantly lower GDP per capita and underdeveloped energy infrastructure. The calibration of energy taxation in the EU at high price levels suitable for Western European economies with high per capita GDP is leading to strong negative social effects and increasing poverty in Eastern European member states. The current implementation of these policies does not recognize to a sufficient extent income levels, regional social inequalities, and the low price elasticity of demand for energy