The writing is on the wall: Fossil fuel subsidies need to become a thing of the past

Financing the transition

“The recent relative fall in energy prices should make it easier for governments to remove tax exemptions and other energy demand subsidies” “Fossil-fuels subsidies are particularly problematic, as they disadvantage clean energy and hamper the transition to a low-carbon economy.”
European Commission’s Energy Prices and Costs Report, p17

By: Maeve McLynn, Finance and Subsidies Policy Coordinator at Climate Action Network (CAN) Europe

On November 30th, the European Commission published its sizable ‘Clean Energy for All Europeans’ Package, including eleven legislative proposals on the medium to long-term fate of the European energy sector. Lost in the flurry of activity surrounding big files, such as those on renewable energy and energy efficiency, were some smaller pieces of the package which went under the radar of European stakeholders. And quite conveniently it would seem.

Two such pieces were the European Commission’s Report on energy prices and costs in Europe, and its Communication on accelerating clean energy innovation.
The ‘Energy Prices and Costs’ Report lays out the current conditions surrounding the price of energy at wholesale level (the point at which energy is initially traded between generators) and at retail level (the eventual price paid by consumers). The ‘Accelerating Clean Energy Innovation’ Communication highlights the importance of robust policies and incentives to shift financial flows and investments away from fossil fuels and towards clean energy.

Without going into the nitty gritty details of these two documents, there is one resounding feature of them that should definitely not go under the radar: the one about subsidies to the fossil fuel industry. Both publications clearly point out a serious problem that we face: while the European Union wants to be a leader in the renewable energy revolution, fossil fuel subsidies are still persistent across the EU and its Member States. The inconvenient truth for European decision makers is that these subsidies distort the energy market by primarily benefiting a handful of energy-intensive and large polluting industry, and that public money is still being used to obstruct the EU’s transition to clean, renewable-based energy.

These publications confirm and expose this energy dilemma. According to the European Commission, approximately €17.2billion was given as direct fossil fuel subsidies to electricity and heating in 2012, support for fossil fuels for transport were separately estimated at €24.7 billion. If ‘external costs’ like air pollution and health costs of fossil fuel combustion are counted in, fossil-fuel subsidies rise to €300 billion a year in the EU [1]. This compares to twice the total annual EU budget.

For civil society and environmental organisations the admission of the harmful and egregious nature of fossil fuel subsidies has been obvious for years. The recent assertions made by the European Commission mark an important indication that fossil fuel subsidies should no longer be an elusive and hidden issue dodged by decision-makers and political actors across the EU, but that they should be front and centre of the debate on transforming Europe’s economy to be 100% renewable and fully energy efficient.

The publications acknowledge the significant distortive impact fossil fuel subsidies have on markets, prices and the clean energy transition, yet the European Commission itself went surprisingly quiet on the topic when promoting its ‘Clean Energy Package’. While the Commission claims that “The EU is committed to removing fossil fuel and environmentally harmful subsidies”, the responsibility to act is tacitly placed on Member States. This stems from the assumption that much of the necessary effort falls under Member State competences rather than those of core European Union institutions.

It is true that government led action is necessary, but EU institutions including the European Commission also need to be torch bearers for phasing out fossil fuel subsidies. Through its policies and processes – such as the Emissions Trading Scheme, capacity mechanisms and state aid guidelines, and funding instruments – the European Commission should put itself forward for greater ambition and action to ensure that no public money in the EU is going to polluting industry. Similarly the EU budget with its European infrastructure and regional funds, as well as the much lauded European Fund for Strategic Investments should be at the forefront of the clean energy transition, pledging to halt any current or potential financial support for the fossil fuel sector.

The problem of fossil fuel subsidies is laid bare, but so too are the opportunities to phase them out. European countries should take advantage of the low energy prices, which allow them to remove harmful subsidies without incurring any social or economic consequences for their citizens. Alongside these measures, governments should make use of European policies and financial instruments to prioritise clean energy alternatives.

The benefits of phasing out fossil fuel subsidies are manifold. It will facilitate the allocation of more support to research and innovation in clean technologies such as energy efficiency, renewable energy and storage. It will also contribute to enhancing European and international climate action, healthier and cleaner local environments, and easing government budgets.

With these two publications, the Commission has put the writing on the wall, clearly indicating that the convenient silence surrounding fossil fuel subsidies needs to be broken. The EU and its leaders cannot shy away from the evidence provided by its own institutions. Fossil fuel subsidies need to become a thing of the past if we are to achieve a meaningful energy transition and avoid dangerous climate change.

[1] Energy prices and costs in Europe {SWD(2016) 420 final}, page 17