BRUSSELS The greenest fuels would become the cheapest under plans for a pan-European energy tax which would also help governments tackle huge debts without raising taxes on workers, draft documents show.
The European Union's executive wants to overhaul Europe's 240 billion euro ($294 billion) annual taxation of energy, which varies widely between countries and often creates paradoxical incentives that encourage the biggest polluters.
"Standard taxation rules discriminate against renewable energies," said an EU briefing document seen by Reuters.
European countries have traditionally put up stiff resistance to interference from Brussels on tax matters.
But a window of opportunity has emerged for a tax overhaul because it could help governments such as Italy, Greece and Spain to cut deficits urgently and reduce public debts without raising unpopular income tax.
Trade unions are planning strikes and rallies across southern Europe this month to oppose deficit-cutting austerity plans as countries try to avoid suffering a debt crisis similar to the one facing Greece.
"The global financial and economic crisis has left deep strains on the public finances of most countries," said the draft document. "This ... should play an important role in offering member states a basis ... to shift the tax burden away from labor or capital."
Diplomats say the proposal's chances of adoption are better now than ever before.
If approved by EU leaders, the new rules would be phased in between 2013 and 2018, laying down minimum rates of taxation for everything from coal, to heating oil to biodiesel.
Farmers might be granted exemptions, although discussions continue within the European Commission, which initiates EU law.
Commission tax spokeswoman Emer Traynor said she could not comment on the draft document, but reiterated the philosophy behind the plans.
"The objective is not to raise taxes -- it is to restructure them in a way that consumers can understand and manage," she said. "Consumers would be able to reduce the amount of tax they pay by changing their behavior and being more energy efficient."
Protections are being crafted in the policy for heavy industries, such as steel and chemicals, that face tough competition from their overseas rivals that enjoy lower costs because they can pollute for free.
Measures are also being drafted to help poor households, which usually pay a relatively high share of their income for heating.
The tax would have two components. The first is an energy tax based on fuels' energy content rather than their volume as now. The second is a carbon tax, which is being discussed in the range of 4 to 30 euros per tonne of carbon dioxide.
Carbon taxation is already used by Denmark, Sweden and Ireland, and Britain, Germany and the Netherlands have various eco-taxes. But the idea met resistance from farmers, fishermen and haulers when French President Nicolas Sarkozy tried to push the idea through last year.
A diplomatic source said France supported the proposal, but Germany was expected to have problems with it.
EU sources say farmers might well win exemptions from the energy taxation, but they are less likely to avoid the carbon element as agriculture is such a key emitter. The EU's various commissioners will debate the plan on June 23.
Over the next decade, the European Union plans to cut by a fifth its emissions of carbon dioxide, the gas most blamed for climate change. The main tool for doing that is its carbon market, the EU Emissions Trading Scheme, which forces polluters to buy a permit for each tonne of carbon they emit.
But about half of the EU's polluters have not been tackled by the scheme, such as transport, which creates 23 percent of all EU emissions, and households which are responsible for 10 percent.
A carbon tax could solve that imbalance and at the same time make a 4 percent contribution to the EU's climate change goals, the draft says.
Those climate goals are undermined by a system which makes the lowest tax demands on the biggest source of pollution, coal, and puts the highest tax on one of the greenest, bioethanol.
Bioethanol is taxed at a rate of 17 euros per gigajoule, 50 percent higher than normal gasoline and more than twice as much as normal diesel, the draft shows.
But under the new scheme, biofuels -- which in theory can absorb almost as much carbon when they are grown as is released when they are burned -- would enjoy a significant tax cut.
(Reporting by Pete Harrison, editing by Timothy Heritage)