The European Commission recently unveiled its proposal for minimum levels of fuel taxation for energy products of all European Union member states taking into account the correlation of the fuel's carbon emission and its energy content.

The proposals, which is expected to take effect in 2013, would see existing energy taxes split into two components that, when taken together, would determine the overall taxation rate of a product.

The Commission believes that the revised taxation structure, will promote energy efficiency and environmentally-friendly products. The European Union placed high importance to reaching the energy and climate targets it has set for itself during the UN international climate talks.

To date, only the EU and Indonesia, out of almost 200 countries, signified an openness to enter into another round of commitment to reduce their country's level of greenhouse gas emissions after the Kyoto Protocol expires in 2012.

Algirdas Šemeta, EU Commissioner in charge of Taxation, Customs Union, Audit and Anti-Fraud said, "The modernized energy taxation system comes at the right moment. Member states are now defining their strategies to exit from the crisis and meet the Europe 2020 targets. They call for action to reduce our dependency on fossil fuels. A fair and transparent energy taxation is needed to reach our energy and climate targets. Our common goal is a more resource-efficient, greener and more competitive EU economy. This proposal sets a strong CO2-price signal for businesses and consumers."

Under the new proposal the minimum tax rate will be split into two parts:

The first will be based on the amount of CO2 emissions that type of fuel puts out. The second will be based on how much energy that they actually produced.

Currently taxes on fuel are based on the volume consumed of energy products - including transport fuels, heating fuels and electricity - which do not take into account energy and climate change targets.

The Commission has proposed that member states "restructure the way energy products are taxed to remove current imbalances" for example, in the case of diesel, which is subject to lower taxation than petrol but is more expensive to produce.

Under the proposed new tax scheme, if based on CO2 emissions of the energy product, it would be fixed at EUR20 per tonne of CO2.

On the other hand, based on the actual energy that a product generates, measured in Gigajoules (GJ), the minimum tax rate would be fixed at EUR9.6/GJ for motor fuels, and EUR0.15/GJ for heating fuels. This would apply to all fuels used for transport and heating.

The proposals allow member states to introduce exemptions for social housing such as energy consumed by households for heating to ensure that poorer households do not suffer from higher taxation.

If the plan will be approved by the European Parliament and Council it will remain in effect until 2023.

The proposals, though, are likely to face opposition from member states and the auto industry.