Energy taxation can support efforts to combat climate change, but current tax levels do not reflect the extent to which different energy sources pollute, according to a review report published this week by the European Court of Auditors (ECA).
All member states still continue to subsidise fossil fuels despite commitments to phase them out. A recent study on energy subsidies carried out for the Commission showed that fossil fuel subsidies from EU member states remained relatively stable from 2008 to 2019 at around €55-58 billion per year.
Two thirds of these subsidies are given as tax exemptions or tax reductions; the other third consisted of feed-in tariffs, feed-in premiums, renewable obligations and producer price support schemes for producing electricity from combined heat- and power-burning fossil fuels.
All sectors receive fossil fuel subsidies, with the energy sector receiving most of them in absolute terms although non-fossil energy subsidies are by far the most dominating ones in this sector. In the industry, transport and agriculture sectors, especially in the two latter ones, fossil fuel subsidies represent the majority of the energy subsidies.
Worrying for tackling climate change and promoting the European Green Deal is that fifteen member states allocate more fossil fuel subsidies, including to coal, than renewable energy subsidies: Finland, Ireland, Cyprus, Belgium, France, Greece, Romania, Lithuania, Poland, Bulgaria, Sweden, Hungary, Slovakia, Slovenia and Latvia (in descending order as the subsidies’ percentage of their GDPs).
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, ECA concludes.
“Energy taxation, carbon pricing and energy subsidies are important tools for achieving climate goals,” said Viorel Stefan, the ECA member responsible for the review and a former finance minister and deputy prime minister in Romania. “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.”
The review covers the period from 2008 to July 2021 and aims at contributing to the discussion on energy prices and climate change, in particular to the upcoming debate around the revision of the Energy Taxation Directive proposed by the European Commission in June last year. Work is ongoing in the European Parliament and Council to agree on a updated framework for the EU.
The review is similar to an audit but falls short of a full-fledged audit report and ends with conclusions instead of recommendations. ECA member Stefan told The Brussels Times that ECA decided to publish the report as a review because of the subsidiarity principle.
“In the context of taxation, the EU can set general rules in the form of directives, but it is the member states that decide about levels of taxation and tax exemptions, in accordance with EU directives. Energy subsidies, which can counterbalance taxation, are also a member state responsibility. This means that the ECA’s audit mandate in this area is limited, even though taxation plays a key role in achieving EU targets.”
In the review, ECA has taken a wider view of the context surrounding the Commission’s proposal. “The proposal looks at how the minimum taxation level fits with the Green deal and the 55% CO2 reduction target for 2030,” he explains. “But our review goes further: in it, we consider how energy taxes, carbon pricing and energy subsidies contribute to achieving the EU’s climate goals.”
The auditors also note that, when debating the Commission proposals, policymakers would have to take both climate objectives and social impact into account.
Does the review include an alternative to the Commission’s proposed revision of the directive?
“No. We have used existing data and information to summarise the effects of current taxation levels, carbon pricing and subsidy levels on climate objectives. We have also summarised the changes in the Commission’s proposals that could lead to improvements on the current situation. We conclude the report by highlighting challenges the EU might face in this area.”
One challenge is ensuring consistency across the EU and in sectors and energy carriers that were previously treated more favourably. 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.
Moreover, while a majority of member states impose high taxes on fuels, several others keep taxes close to the minimum established by the directive, and this may distort the internal market. Low carbon prices and low energy taxes on fossil fuels increase the relative cost of greener technologies and delay the energy transition.
The impact of energy taxation on households can also be significant, and result in pushback against energy taxes. The energy tax burden on households varies significantly by member state. The poorest households in Luxembourg, Malta, Finland and Sweden spend less than 5 % of their income on energy. In Czechia and Slovakia, they spend more than 20 % of their income on energy.
“Taxation initiatives at both EU and Member State level can help us reach our climate policy goals by encouraging a switch to cleaner energy, more sustainable industry and more environmentally friendly choices, as part of a socially fair green transition,” a Commission spokesperson told the Brussels Times, referring to the Fit for 55 package of proposals and the European Green Deal.
“Many of the issues highlighted by ECA are addressed by the Commission’s recent proposal to update the EU’s energy taxation rules and strengthen and extend EU emissions trading – key elements of our ongoing efforts to meet the EU’s environmental objectives.”
The Fit for 55 Package will incentivise the uptake of renewable energy and cleaner fuels, accelerate the shift to low-emission transport, build and renovate more energy-efficient buildings, and invest in innovation and research into new clean technologies, according to the Commission.
Does the revision of the energy taxation directive aim at ending the current tax subsidies to fossil fuels?
“The Commission is of the opinion that fossil fuel subsidies should end. To increase transparency, member states are required to include information on fossil fuel subsidies in their National Energy and Climate Plans (NECPs) and the Commission is now mandated to publish an annual report on energy subsidies in the member states.”
The spokesperson highlighted the example of Belgium’s commitment in 2021, as part of its Recovery and Resilience Plan, to reform its company car scheme to make it more sustainable.
“In addition, some of the issues regarding detrimental transport and energy tax subsidies will be addressed by the proposed revision of the Energy Taxation Directive, under which a number of national exemptions and rate reductions will be removed, with much less margin for member states to set rates below the minima for specific sectors.”
The Brussels Times