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Latvia – EHS Candidate for Reform

Excise tax exemption and tax relief for natural gas for industrial consumers

The goal of the excise tax exemption and tax relief for natural gas for industrial consumers is to lower the excise tax burden for industrial consumers using natural gas for industrial purposes. This subsidy was introduced in July 2011. It grants a reduced excise tax rate of EUR 0.55 per MWh for industries that use natural gas for industrial manufacturing and related processes, agricultural raw materials processing and for technology used to maintain indoor climates of industrial and agricultural raw material processing premises. This reduced rate is much lower compared to the standard reduced rate of EUR 1.65 per MWh for industries in the heating sector and the standard rate of EUR 9.65 per MWh. The main beneficiaries of this subsidy are industries and industry consumers that use natural gas for manufacturing and processing, especially the processing of agricultural raw materials. Other countries with similar subsidies include Belgium, Czech Republic, Germany, Estonia, Greece, Spain, Finland, France, Croatia, Ireland, Italy, Lithuania, Luxembourg, the Netherlands and Sweden.   

Natural gas
© Doris Morgan / Unsplash

The budget impact of this reduced excise tax rate was EUR 0.902 million in 2020 and is slowly decreasing compared to previous years. If the subsidy was abolished, prices would increase by 36% and consumption would decrease by 7.8%. It should be noted that these numbers are based on the whole industry and may be an overestimation for the benefiting industries from this subsidy.

The environmental impacts of this subsidy include those associated with greenhouse gas emissions and natural gas consumption. CO2 emissions would decrease by 7.8%, the same amount as consumption if the subsidy were removed.  Since 2005, Latvia’s greenhouse gas emissions have been rising, whereas natural gas consumption declined between 2018 and 2020.

In the past 10 years, there has been an increase in the number of fossil fuel subsidies. Latvia is currently reviewing its implemented excise tax exemptions, including those for fossil fuels. The social and economic impacts of these exemptions are being assessed, but assessing the environmental impact is not yet required. Several groups are calling for reforms on the excise tax rates. There are suggestions to change the country’s taxation system, proposals to gradually equalise the tax rates on gaseous fuels and restructure the minimum tax rates based on energy content and environmental performance. Other plans suggest phasing out energy subsidies and removing the tax exemption on natural gas so that the industries benefiting from this subsidy would be taxed at the standard rate of EUR 9.65 per MWh.  To compensate for this reform, the tax income could be used for funding energy efficiency investments or to reduce labour costs.

More information on the excise tax exemption and tax relief for natural gas for industrial consumers and other candidates for reform in Latvia and other Member States can be found in the country case studies and factsheets compilation.