Fossil fuels still subsidized more than renewables in EU, auditors find

The EU’s energy taxation and carbon pricing policies don’t square with its climate goals, the European Court of Auditors said in a review. The document reveals most member states gave more subsidies in 2020 for fossil fuels than for renewables.

Even though renewable energy subsidies almost quadrupled over the 2008-2019 period, those for fossil fuels remained relatively constant over the last decade despite commitments from the European Commission and some member states to phase them out. The data has just been published by the European Court of Auditors in a review, which showed current tax levels do not reflect the extent to which different energy sources pollute.

While a majority of the European Union’s member countries impose high taxes on fuels, several others keep taxes close to the minimum established by the Energy Taxation Directive, which may distort the internal market, the authors said. Low carbon prices and low energy taxes on fossil fuels increase the relative cost of greener technologies and delay decarbonization and the energy transition, they warned.

Challenging social and economic transition

“Phasing out fossil fuel subsidies by 2025, a goal which the EU and its member states have committed to, will be a challenging social and economic transition. In particular, a perception of unfair treatment for some groups or sectors may result in resistance to the transition towards a greener economy. The impact of energy taxation on households can also be significant, and result in pushback against energy taxes,” the document reads.

Perception of unfair treatment for some groups or sectors may result in resistance to the transition towards a greener economy

The amounts that households spend on energy including heating and transportation vary considerably: in some cases, such as the poorest households in Czechia and Slovakia, it can be more than 20% of their income.

To alleviate the risk of rejection of tax reforms, the auditors point to recommendations made already by several international organisations: to reduce other taxes and apply redistribution measures, while ensuring greater transparency and communication about the reasons for reforms.

Auditors urge for consistent energy taxation

EU nations subsidized fossil fuels with EUR 55 billion to EUR 58 billion per year in total in the tracked period. Fifteen of them spent more on fossil fuel subsidies than on renewable energy subsidies in 2020, in the following order: Finland, Ireland, Cyprus, Belgium, France, Greece, Romania, Lithuania, Poland, Bulgaria, Sweden, Hungary, Slovakia, Slovenia and Latvia.

The best conditions for renewables are in the Czech Republic. Croatia is the only country in Southeastern Europe that made it to the positive list, landing at the sixth position out of 12.

The auditors point to challenges faced by policymakers: ensuring consistent energy taxation across sectors and energy carriers, reducing fossil-fuel subsidies, and reconciling climate objectives with social needs.

Fifteen out of 27 member states spent more on fossil fuel subsidies than on renewable energy subsidies in 2020

“Energy taxation, carbon pricing and energy subsidies are important tools for achieving climate goals. The main challenge, in our opinion, is how we strengthen the links between regulatory and financial measures and find the right mix between these two,” said Viorel Ştefan, member of the European Court of Auditors responsible for the review. “With our review, we aim to contribute to the discussion on energy prices and climate change, and in particular to the upcoming debate around the proposed revision of the Energy Taxation Directive.”

Under the current Energy Taxation Directive, more polluting sources of energy may have a tax advantage compared to more carbon-efficient ones: for instance, coal is taxed less than natural gas, and some fossil fuels are taxed significantly less than electricity, the report adds.

Slovenia is only EU member state in Southeastern Europe with explicit carbon taxes

Explicit carbon taxes, which directly put a price on CO2 emissions, are in place in 14 member states. The rates are from EUR 0.1 per ton of CO2 in Poland to over EUR 100 per ton in Sweden.

The taxes do not usually apply to sectors already covered by the Emissions Trading System, EU ETS. The highest share of total emissions covered is in Ireland (49%), followed by Denmark and Sweden (40%). Slovenia is the only country in the list from the region tracked by Balkan Green Energy News. It has a rate of 17.4% for transportation and heating, covering 24% of emissions.

Carbon pricing set to be imposed on maritime, road transportation, buildings

The European Commission published a proposal in July for a revision of the Energy Taxation Directive. It still allows member states to reduce energy tax rates for some sectors, for environmental, energy efficiency and energy poverty reasons.

The Emissions Trading System is set to be extended to maritime transportation, and a separate scheme is intended to be rolled out for road transportation and buildings.

Under the current system, free emissions trading allowances allow some market participants not to pay for part of their CO2 emissions. The gradual phasing out of the free allowances, linked to the risk of carbon leakage, (an increase in greenhouse gas emissions as a result of transferring production to a country with laxer emissions constraints) is accompanied by the proposed phasing in of the Carbon Border Adjustment Mechanism (CBAM).