EU Court of Auditors: Fossil fuel subsidies hinder energy transition

EU energy tax policies, which continue to support fossil fuels by taxing less and subsidizing them more from renewable energy sources, “do not align with climate targets”, according to a report by the EU Court of Auditors.

“Although subsidies for energy from renewable sources almost quadrupled between 2008-2019, fossil fuel subsidies have remained relatively stable over the last decade despite commitments by the European Commission and some Member States to phase them out,” the EU Court of Auditors said.

Under the current Energy Taxation Directive, more polluting energy sources outperform tax advantages compared to more energy-efficient carbon sources: for example, coal is taxed less than natural gas and some much less than electricity.

In addition, according to the Court of Auditors, while the majority of Member States impose high taxes on fuel, several Member States keep taxes close to the minimum levels set out in the Directive, which may distort the internal market.

“Low carbon emissions and low energy taxes on fossil fuels increase the relative costs of more green technologies and delay energy transitions,” the report said.

In addition, the Court notes that while some energy subsidies can be used to transition to a lower carbon economy, fossil fuel subsidies hinder energy efficiency.

In total, Member States’ subsidies for fossil fuels exceed € 55 billion per year and fifteen Member States spend more funds on fossil fuel subsidies than on renewable energy subsidies.

“The phasing out of fossil fuel subsidies by 2025, a goal to which the EU and its Member States have committed, will be a difficult transition from a social and economic point of view,” the auditors said. In particular, the perception of unequal treatment of certain groups or sectors may halt the transition to a more green economy. The impact of energy taxation on households can also be significant and lead to reactions to energy taxes.

The amounts households spend on energy (including both heating and transport) vary considerably: in some cases, such as the poorer households in the Czech Republic and Slovakia, these amounts can be more than 20% of their income. To reduce the risk of rejection of tax reforms, the auditors note the recommendations already made by various international organizations, such as the reduction of other taxes and the implementation of redistribution measures, while ensuring greater transparency and communication on the rationale for the reforms.

As part of the “Fit for 55” legislative package, which aims to put the EU on track to reduce greenhouse gas emissions by 55% by 2030, the Commission has published a proposal to revise the Energy Taxation Directive. It also allows Member States to reduce energy tax rates in certain areas, for environmental, energy efficiency and energy poverty reasons. The package also includes a proposal to expand the emissions trading scheme to cover maritime transport, and to introduce a separate emissions trading scheme for road transport and buildings.

The Court considers that, under the current system, free emissions trading rights allow some market participants not to pay their share of certain CO2 emissions. The phasing out of free carbon leakage rights (ie increase in greenhouse gas emissions as a result of shifting production to countries with less stringent emissions restrictions) is accompanied by the proposed phasing-in of the carbon frontier adjustment mechanism . The aim of this new mechanism is the pricing of carbonaceous emissions from imports of certain goods.

Finally, auditors note that policy makers should take into account both climate and social impact objectives.

Source: AMPE