Taxation Reform: Bridging Europe's Disturbing Spark Gap in Electricity

Europe's Overreliance on Electricity: A Hidden Cost

While the push for electrification grows stronger in Europe, a troubling fact remains: the taxation of electricity is disproportionately higher than that imposed on fossil fuels such as natural gas. The ongoing debate, underscored by the recent leaked European Commission recommendation, emphasizes a vital shift in understanding how electricity should be viewed in the context of economic and environmental responsibilities.

The Historical Context: A Legacy of Distortion in Energy Policy

The significance of the Commission’s recommendation cannot be overstated. For decades, electricity has been treated as a ‘polluting end product’, weighed down by excessive taxes and levies. This approach stands in stark contrast to the clean energy carrier role that electricity plays in the fight against climate change and in enhancing energy security for the continent. In essence, the European energy policy has long perpetuated a harmful distortion, whereby the spark gap—a measure of the price disparity between electricity and gas—has evolved into a formidable barrier to investment in electrification solutions.

Understanding the Spark Gap: A Discriminatory Price Signal

As of 2024-2025, households in Europe faced electricity prices nearing $0.35 per kWh, while gas prices languished at a mere $0.10 per kWh. This troubling 'spark gap' is not an organic outcome of market dynamics; rather, it is a product of policy choices that impose significant network charges and levies on electricity bills. The taxes that burden electricity can constitute over 50% of the retail price, leading to a discouragement of electrification, despite its efficiencies in reducing emissions and long-term costs.

Reforming Taxation: Opportunity for Immediate Action

Reference insights from Eurelectric point to a multifaceted approach to reforming taxes and levies. Countries could immediately benefit by reducing national excise duties and VAT on electricity to EU minimum levels. Additionally, reallocating taxes from electricity to fossil fuels could help fortify electricity’s commercial appeal while fostering a transition towards decarbonisation. This redirecting of fiscal responsibilities is not only strategic—it also aligns with the realities of a greener energy future.

Investment Certainty: Key to Long-Term Competitiveness

The European Commission's recent acknowledgment sheds light on the direct correlation between energy affordability and investment certainty—a crucial factor for attracting businesses and industries. By revisiting current economic structures that heavily tax electricity, the EU can secure an advantageous landscape for long-term industrial competitiveness. This shift would signal to investors that the continent is committed to embracing a sustainable energy transition, thus reinforcing technological advancements in clean energy sectors.

Future Predictions: The Impact of the ETS2 Framework

As the proposed European Emissions Trading System (ETS2) is set to launch, it offers a pivotal chance to recalibrate the investment dynamics further. Implemented correctly, ETS2 could yield substantial funds—an estimated €183–483 billion through 2032—targeting investments in energy efficiency and renewable technologies across Europe. This framework carries the dual promise of reducing tax burdens on electricity while encasing policies designed to protect vulnerable households during the transition.

Conclusion: The Path Forward

In this light, addressing the net taxation burden on electricity is not just imperative but urgent. Should the EU act, it could bridge the critical spark gap that presently deters necessary advancements in clean energy technologies like electric vehicles and heat pumps. This would not only elevate energy affordability but also enhance the industrial competitiveness vital for Europe’s economic future.

Therefore, as citizens and policymakers, we should advocate for a coherent energy strategy that recognizes the vital role of electricity as a corner-stone in the energy transition. Doing so will galvanize the commitment to climate action and promote economic resilience in the face of rapid change.