Who needs to pay whom? Commission's energy proposals sow confusion

Viru Keemia Grupp.
Viru Keemia Grupp. Source: Rene Kundla/ERR

Estonian state officials are trying to make sense of the European Commission's energy crisis proposals from a week ago. There is plenty of confusion from taxing shale oil producers to the question of whether a majority will suffice in place of consensus.

The Ministry of Economic Affairs and Communications (MKM) has asked companies to comment on the European Commission's energy proposals by Wednesday.

Ahti Asmann, CEO of Viru Keemia Grupp (VKG), received the request last week alongside a note that shale oil producers will likely be included among those who have to come up with a so-called solidarity contribution.

"What does it mean 'likely'?" Asmann asked. "Let us first determine what the Commission means. This clarity needs to come from the Estonian government, as well as clarity in terms of where Estonia stands."

Both are difficult and urgent tasks. EU energy ministers are expected to reach an agreement at a meeting on September 30. Because Estonia's position should also be approved by the Riigikogu European Union Affairs Committee, the government should discuss the matter on Thursday.

Solidarity, or money, required from two Estonian companies

The solidarity contribution is based on the presumption that fossil fuel producers have profited massively from the crisis. This means that a part of their proceeds needs to be taken away and given to the poor.

First, companies' average profit in 2019-2021 would be calculated. Companies would be allowed to keep that sum plus 20 percent of this year's profit. The remaining 33 percent would go to the state budget. Confusion arises from the fact that the Commission's bill mentions oil, gas and coal but not oil shale.

MKM Undersecretary Timo Tatar said on Monday that the ministry has written to the Commission on this topic.

"We gather from the Commission's recent interpretation that shale oil producers should fall in that solidarity obligation category," Tatar said.

Estonia has three oil shale companies. The important thing is that only those for whom producing fossil fuels is the main business would be charged under the Commission's plans. State-owned Enefit Power is mainly engaged in electricity generation, which leaves Viru Keemia Grupp and the Kiviõli Keemiatööstus.

Ahti Asmann was less than thrilled over the prospect of having to surrender a part of the company's profit. "In 2020, VKG paid €2 million for the right to use oil shale, while we will be paying €30 million this year. The CO2 fee has gone up from €30 to €100 per ton," he said.

Asmann added that the price of oil shale is in correlation with that of oil, and that while VKG has done better this year, he still does not consider the Commission's proposal fair.

"The reference base includes a period of this decade's deepest oil crisis. In other words, the worst period is compared to other periods of high prices to suggest the difference constitutes unfair profit," Asmann offered.

What Simson was after and what was written down?

Still, a ray of light shines for shale oil producers from under the Ministry of Finance's door.

"Based on recent phrasing of regulations, I rather feel the solidarity fee will not impact Estonian entrepreneurs," said Evelyn Liivamägi, the ministry's undersecretary for financial and tax policy. "Oil shale seems to have been left out. It talks about oil, gas, coke and their mining, extraction and refinement. Nothing that any company in Estonia is involved in."

Liivamägi admitted there is plenty of confusion still.

For example, the European Commission's Representation in Estonia said they have nothing to add to Energy Commissioner Kadri Simson's words to business paper Äripäev: "It [the proposal] concerns shale oil but not turning oil shale into electricity in Estonia's case." The Commission is pointing to a document from years ago that suggests saying "crude oil" is also saying "shale oil."

This is of little help for Estonian officials. "Kadri Simson has told us about what they wanted to achieve. But it is not quite what has made it to the draft regulation. There is plenty of confusion," Liivamägi said.

She added that all Member States have questions about the Commission's rather vague proposals.

"All of these problems will need to be solved before this matter put to a vote, in order to avoid future problems," Liivamägi suggested.

Tax or fee, and who will pocket the money?

While shale oil is a local matter for Estonia, more Member States are asking about the meaning of a solidarity contribution.

The Commission does its level best to avoid using the word "tax" in the 40-page document. The Estonian Representation also says the instrument is a temporary fee.

Evelyn Liivamägi nevertheless refers to it as a tax. "And it is not just our opinion. There were seven or eight Member States who considered it a tax as of last week," she said.

Technically, the difference lies in how the money can be used. A fee is collected to finance a specific thing, such as labor market measures.

"When it comes to a tax, the use of revenue does not have to be fixed on the level of legislation," Liivamägi explained.

The Commission has opted for something in the middle. On the one hand, it is said that the money should go toward alleviating energy costs. In other words, to households and companies. At the same time, it is suggested toward the end of the list that Member States should be able to pay some of it to the EU budget.

"What share are they after? Or how is a Member State expected to contribute after distributing all of the money? This requires further specification," Liivamägi remarked.

Consensus or majority

But the question of whether the solidarity contribution is a tax or a fee could determine the fate of the Commission's proposals. Laying down a tax requires full consensus, while a fee can be ordered through a qualified majority in the EU.

It is possible the proposal will pass without any additional clarity added to it. This would allow Member States that do not agree with the new tax to turn to the Court of Justice. It is once again unclear what would happen when a judgment would finally be rendered years later. As is what would be the Commission's plan for those who refuse to collect the solidarity contribution.

There is a host of other questions Estonian officials are seeking to answer. For example, the tax versus fee aspect can also be applied to renewables producers' price ceiling. From them, the Commission is looking to take all revenue beyond €180 per megawatt-hour, not just profits.

"It matters not whether you call a dog a hound or a mutt. Taking away a part of someone's money happens through taxation," Liivamägi said, adding that lawyers would likely have a more nuanced take.

The bill including Estonia's positions should be put together at the economy ministry.

Timo Tatar said that these will at the very least exist on paper by Thursday.

"That is likely when we will be presenting the first draft and ideas to the government," he said. "Whether they will be approved, or whether we will receive input we can use to specify our feedback is too soon to say."


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Editor: Marcus Turovski

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