Taxation of natural gas, like that of energy as a whole, varies from one country to another in Europe. This applies, for example, to the level of taxation, the size of the tax burden (absolute, in relation to other energy sources and in relation to the gas selling price) and the use of tax revenues.

Often there exists a distinction between sectors. As a rule, the main focus of taxation is the residential and commercial sector. The tax rates in this sector are in some cases well above the rates applicable in the industry sector. Use of gas for power generation is taxed in only a few countries. In some cases, a regional differentiation between tax levels exists.

In the case of VAT, which is levied on residential customers in West European countries, a wide range of rates exists at present.

The different levels of taxation of natural gas in the EU leads to serious distortions of competition incompatible with a single market, which suggests a clear need for harmonisation of taxation of natural gas (just like taxation of energy in general). A first step in this direction was taken after difficult and long negotiations by the adoption of the Directive 2003/96/EC on 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity.

The following applies to the minimum tax rates for natural gas: - For the industrial use of natural gas the minimum tax rate is 0.054 eurocents/kWh (gcv). - In the residential sector the minimum tax rate is 0.108 eurocents/kWh. - In the power generation sector, the minimum tax rate is zero. Output taxation is generally envisaged here.

However, the Directive contains transitional periods and/or exemptions and special arrangements for energy-intensive businesses and use of energy for cogeneration. Some of them are optional. These include tax relief for specific measures serving environmental and climate protection or to increase energy efficiency. Special arrangements and transitional periods for the new EU members were laid down in an amendment to the aforementioned Directive adopted in April 2004.

The Directive is an initial, albeit modest step towards achieving and refining the single European market by creating similar frameworks for the taxation of energy, especially natural gas. The compromise arrived at by the EU countries in laying down binding minimum tax rates is likewise only a first step - a step which, by fixing minimum tax rates and allowing exemptions and transitional periods, allows the EU members to adopt national rules that contradict harmonisation.