Luxembourg produces no fossil fuels, nor does it refine any petroleum. About half of the electricity is imported. The dominance of imported oil in the total energy supply can be explained by the sale of petroleum products to truckers crossing Luxembourg and cross-border commuters who take advantage of the country’s lower excise taxes on these fuels compared with neighbouring states. Bioenergy was the main source for electricity generation in Luxembourg in 2022, accounting for 32.7% of total power production. Closely following, wind energy made up 28.3% of the country's power mix. That year, over 85% of Luxembourg's electricity production was derived from renewable sources.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
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Luxembourg
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
Luxembourg meets its minimum oil stockholding obligations as a member of the IEA and the EU by obliging all oil importers to maintain stocks of petroleum products equivalent to at least 90 days of deliveries into domestic consumption during the previous calendar year. Eighty-five per cent (85%) of the storage capacity however is located outside the country.
Luxembourg’s natural-gas market is dominated by a small number of vertically integrated companies. Creos Luxembourg S.A. (formerly SOTEG) owns and operates the transmission system, and it supplies the majority of the market. Most of Creos’ shares are owned by various private utilities, though the State maintains minority ownership. Creos also operates one of the two main electricity-transmission systems in the country. The State of Luxembourg owns about 40% of the company, via direct shareholdings and through the Société Nationale de Crédit et d’Investissement. The other main electricity grid operator is the Société de Transport de l’Electricité (SOTEL). Most of the electricity-distribution companies are owned by municipalities.
Energy prices and taxes
Luxembourg sets a maximum price for oil products sold to the end-user using a price-setting mechanism through a signed agreement with oil importing companies. Gasoline, liquefied petroleum gas (LPG), diesel, and heating oil are all subject to this maximum price. The pricing formula is based on Platt’s Antwerp CIF product prices to which the standard transport price from Antwerp to Luxembourg, the standard distribution margin covering the profits of importers and filling stations, and the cost of compulsory storage is added. The different costs are determined by the government after discussion with the oil companies’ association (Groupement Petrolier Luxembourgeois) and the retailers. There is a four-day delay between the time prices are quoted and the time retailers are able to adjust to a new maximum rate. Luxembourg’s natural-gas and electricity markets are regulated by the Institut Luxembourgeois de Régulation (ILR), whose responsibilities include monitoring competition and preventing the abuse of dominant position. Because of the small size of the market and the large share of costly underground distribution cables, electricity prices before taxes are higher than in almost any other OECD country.
Luxembourg charges a reduced rate of VAT of 14% on solid mineral fuel, kerosene and mineral oil used for heating compared with the general VAT rate of 17% (from 2015). An even lower rate of 8% is applied to LPG, natural gas as well as electricity. In recent years, the excise rate on gasoline increased twice, by EUR 0.02/litre in 2007 and by EUR 0.01/litre as per May 2019. Adjustments on diesel excise tax occurred more frequently and almost on an annual basis at EUR 0.265/litre in 2005 to appreciate to EUR 0.33/litre by 2012 until reaching its current level at EUR 0.355/litre in 2019. These increases were dubbed “Kyoto-cent”, introduced as an incentive for consumers to reduce fuel consumption. With the promulgation of the Modified Law of 17 December 2010 fixing excise rates and similar taxes on energy products, electricity, manufactured tobacco products, alcohol and alcoholic beverages, rates were further modified. For 1 000 litres at 15⁰C, leaded gasoline and unleaded gasoline with sulphur content lower than 50 mg/kg both pay an excise of EUR 20, while gas oil with sulphur content of less than 50 mg/kg pays EUR 25.
Figure 2. Total tax rebates and support for fossil fuels in Luxembourg
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
During 2022, the government released aid packages in response to high inflation and the global energy crisis. The total cost of the measures amounts to about EUR 830 million. Within the aid established, the following stand out in particular: financial support (EUR 225 million) to specific companies seriously affected by energy prices. From 1 April 2022, to 31 December 2023, there will be a reduction of 7.5 cents/EUR per liter (taxes included) for heating diesel and industrial/agricultural diesel. The Government will cover the costs of the natural gas network (charges + taxes) for all residential customers, as implemented on April 27, 2022. The Government confirmed the implementation in February 2022 of an extension and add-on (200 to 400 EUR) of the social subsidy to help pay energy bills in vulnerable groups.
The fiscal cost of support measures for fossil fuels in Luxembourg was estimated at EUR 130.14 million in 2022 (Table 1). Ninety-nine per cent (99%) was directed at end user beneficiaries, as opposed to 0% directed to firms. Support was mainly given out in the form of tax expenditures (EUR 80.59 million) accounting for 62% of the total fiscal cost of support measures. Direct transfers amounted to EUR 49.56 million.
The fiscal cost of support measures for fossil fuels has increased by 23% since 2017. Since last year, tax expenditures have decreased by -17%, from EUR 96.41 million to EUR 80.59 million and direct transfers decreased by -57%, from EUR 66.54 million to EUR 49.56 million. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 1. Fiscal cost of support measures for fossil fuels (in millions of national currency)
|
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|---|
|
Tax expenditures |
96.461 |
96.545 |
98.995 |
93.600 |
96.406 |
80.589 |
|
Direct transfers |
9.392 |
24.366 |
31.754 |
29.544 |
66.541 |
49.556 |
|
Total |
105.853 |
120.911 |
130.749 |
123.144 |
162.948 |
130.145 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in millions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
|
|||
|
Lower excise - gasoil - heating |
57.698 |
67.632 |
-9.934 |
|
|
Lower excise - gasoil - commercial and industrial use |
9.491 |
12.995 |
-3.504 |
|
|
Lower excise - gasoil - agriculture and navigation |
7.639 |
8.302 |
-0.663 |
|
|
Direct transfers |
||||
|
Free allocated allowances to ETS industries |
46.014 |
8.907 |
37.106 |
|
|
Free allocated allowances to ETS aviation |
3.451 |
0.485 |
2.967 |
|
|
Support to the gas infrastructure |
0.091 |
(Started in 2021) |
0.091 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3. Description of selected support measures for fossil fuels
|
Lower excise - gasoil - heating |
Sales of other kerosene in Luxembourg are subject to a lower rate of excise duty when used for commercial and industrial use. Since 2015, normal excise (applied to transport purpose) is EUR 335 per 1 000 litres. For heating purpose, this excise is reduced to EUR 10 per 1 000 litres. |
|
Lower excise - gasoil - commercial and industrial use |
Sales of other kerosene in Luxembourg are subject to a lower rate of excise duty when used for commercial and industrial use. Since 2015, normal excise (applied to transport purpose) is EUR 335 per 1 000 litres. For commercial and industrial purpose, this excise is reduced to EUR 21 per 1 000 litres. |
|
Lower excise - gasoil - agriculture and navigation |
Sales of other kerosene in Luxembourg are subject to a lower rate of excise duty when used for commercial and industrial use. Since 2015, normal excise (applied to transport purpose) is EUR 335 per 1 000 litres. For agriculture and navigation purpose, this excise is reduced to EUR 0 per 1 000 litres. |
|
Free allocated allowances to ETS industries |
For period 2021-2025, 21 industrial companies will benefit from free emission permits |
|
Free allocated allowances to ETS aviation |
For period 2021-2025, 5 aviation companies will benefit from free emission permits |
|
Support to the gas infrastructure |
In 2021, the Government voted a financial support for the construction of gas network. |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.