Introduction
Electricity taxes are charges levied by governments on the consumption or supply of electricity and collected through energy bills. They are part of the wider system of energy taxation, alongside taxes on fossil fuels such as gas, oil and coal. Although they appear as an additional cost on consumers’ bills, they are ultimately a way for governments to collect public revenue from energy use. Because energy and in particular electricity is essential and consumed continuously, energy taxes provide governments with a stable source of income that can help finance public budgets.
The way these taxes are recovered is relatively straightforward: suppliers collect the relevant taxes and levies from consumers as part of their electricity bills and then transfer the revenues to the public authorities. This means that taxation can have a direct and visible impact on the final price households and businesses pay for electricity. While taxes can serve legitimate purposes (in particular discouraging pollution and influencing consumer choices) their design matters greatly. If electricity is taxed more than fossil fuels, taxation can make electricity and hence electrification less attractive, working against climate and energy objectives.
This is particularly important as Europe seeks to rapidly replace fossil-fuel use with (renewable) electricity, as per the EU Electrification Action Plan. The question is therefore not whether energy should be taxed, but what governments choose to tax, at what level, and for what purpose. A well-designed system should raise the revenues needed to fund public services and a just transition while ensuring that taxation reinforces climate policy. The stakes of the current reform are therefore much broader than the price of an electricity bill: it is about whether Europe’s tax system will continue to favour fossil-fuel consumption or help make renewable electrification the affordable and accessible choice for everyone.
What electricity taxes are we talking about
Taxes are one of the main components of electricity bills, together with the energy costs and network tariffs. They comprise:
- Excise duties: these are consumption taxes applied directly to electricity use. Under the EU Energy Taxation Directive, Member States set national rates subject to EU minimum rates. They are typically charged per unit of electricity consumed (e.g. €/MWh).
- VAT: electricity is also subject to value-added tax, generally applied as a percentage of the final taxable price. Unlike an excise duty, VAT increases as the underlying price of electricity increases. Member States have some flexibility over the VAT rate they apply within the framework of EU VAT rules.
- Levies and other charges: Member States can also add charges to electricity bills to finance specific policies or public expenditures. These can include support for renewable energy, energy efficiency, social schemes, capacity mechanisms, public service obligations, or even non-energy-related costs. Their design and size vary considerably between countries.
The Emissions Trading System should be clearly distinguished from taxes, levies and charges on electricity consumption. A market-based instrument that puts a price on greenhouse gas emissions, it influences electricity prices when fossil-fuel-fired power plants set the marginal wholesale market prices. The role of the ETS is to incentivise the decarbonisation of the energy (and industry) mix and should therefore not be confused with the taxes and charges that governments apply directly to electricity consumption.
