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The European Union's efforts to revise the Energy Taxation Directive (ETD) could lead to a significant extension of tax exemptions for commercial aviation and shipping until 2035. This development emerges as EU member states engage in protracted negotiations, with the Danish government, currently holding the presidency, seeking a compromise amid a complex political landscape.

Originally, the European Commission's 2021 proposal aimed to phase out the tax holiday for aviation and marine fuels, introducing excise duties tied to the greenhouse gas emissions intensity of the fuels. This initiative was part of the broader Fit for 55 climate policy package, which seeks to reduce the EU's greenhouse gas emissions by 55% by the end of this decade. However, the requirement for unanimous support from member states has slowed progress, prompting the Danish presidency to scale back the reforms.

Under the latest draft, while small aircraft and private leisure boats may face new excise duties, commercial aviation and shipping could continue to operate tax-free until 2035. This exemption raises concerns about the EU's overall decarbonization goals, as it effectively allows the continued use of fossil fuels without adequate financial disincentives, potentially hampering the transition to more sustainable alternatives.

Critics, including Diane Vitry, the aviation director at the nonprofit organization Transport & Environment, have expressed skepticism regarding the proposal's efficacy. They argue that the continued affordability of fossil kerosene undermines the adoption of sustainable aviation fuels (SAFs), which remain prohibitively expensive due to the disparity in costs.

The issue is compounded by the current pricing dynamics in the fuel market. As of early September, SAFs were priced significantly higher than conventional jet fuel, with a reported cost of €2,744.25 per metric ton—€285 above standard jet fuel prices. Analysts anticipate that the economics of SAFs will remain challenging as the market grapples with cautious investor sentiment and tight European supplies.

The EU's "Refuel EU Aviation" initiative mandates that a growing percentage of aviation fuel supplied within the bloc must consist of SAFs, escalating from 2% in 2025 to 70% by 2050. However, traditional jet fuel is still expected to dominate demand, with forecasts indicating that conventional jet fuel will average around 1.6 million barrels per day by 2026.

As discussions continue, EU member states may reach a political agreement on the revised proposal during a finance ministers meeting in November. However, pressure from European shipowners for an extension of the tax exemption until 2040, which would include electricity as well, adds another layer of complexity to an already intricate negotiation process. The outcome will significantly influence the future of fuel taxation and environmental policies across the aviation and shipping industries.