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Fossil fuel subsidies in Europe

 

CAN Europe Fossil Fuel Subsidies Categories MoneyWhat are fossil fuel subsidies? 

 

Fossil fuel subsidies – public financial support for fossil fuels – come in many forms and through many methods. In the EU, it has been hard to capture the level and extent of fossil fuel subsidies, mainly for two reasons: subsidies can be facilitated and applied through numerous policy processes and tools, and subsidies vary in their form across different EU Member States. 

CAN Europe, similar to the WTO, argues that any form of government action or public intervention which lowers the cost of fossil fuel energy production or consumption can be defined as a subsidy. This includes e.g. direct funding (e.g. for coal mines’ operations) and tax exemptions (e.g. on diesel fuel), preferential loans and guarantees from public banks, and giving favourable access to resources, infrastructure and land.

In addition, CAN Europe agrees with the International Monetary Fund (IMF) that environmental degradation, air pollution and health costs stemming from extracting and burning fossil fuels is not carried by the industry but paid by society. Therefore, these ‘external costs’ are also considered as fossil fuel subsidies.” All forms of fossil fuel subsidies (in Europe) are inefficient, harmful to the environment and blocking the transition to clean energy systems.

 

What is the political situation?

 

In 2009, G20 leaders committed to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.”Since then they have reiterated their commitment several times, with little evidence of fiscal change.

Governments have also, in different forms, reiterated their commitment to address environmentally harmful subsidies, including fossil fuel subsidies. They have done this through the Addis Ababa Action Agenda (Financing for Development), and Agenda 2030 – Transforming Our World (Sustainable Development Goals). In addition, the Paris Agreement stipulates that financial flows need to be aligned with low emissions and climate resilient development, further suggesting that our financial actions need to truly represent climate action.

 

What must the EU do?

 

CAN Europe calls on the EU to develop and agree on a roadmap to phase out fossil fuel subsidies by 2020. Such a roadmap should include strict timelines for the phase-out of fossil fuel subsidies with country-specific and measurable outcomes. Other European countries must do the same.

Read our report Phase-out 2020: Monitoring Europe’s fossil fuel subsidies (September 2017) and our briefing Europe in motion - Ending all public financial support for fossil fuels (October 2017).

You can also find our other publications on fossil fuel subsidies here.

 

 

Mapping fossil fuel subsidies in Europe

 

 National level ...  

Government Budgets' direct payments and fiscal incentives

National Development Banks (KfW, etc.)

Export Credit Agencies (ECA) 

  ... financing fossil fuels through …  

Fossil fuel production

Direct investment in fossil fuel infrastructure

Capacity Payments for energy production

Tax Decisions & preferential tax treatment (energy production, transport, electricity)

State Aid (e.g. for coal mining)

State Owned Enterprises (SOE) (e.g. energy production)

Royalty exemptions

Guaranties and liabilities taken over

Research and development (e.g. CCS)

Fossil fuel consumption

Regulated prices

Tax breaks and exemptions from other levies

Rebates & free provision of fuels, etc

 

EU level ...

EU Budget

Regional Development Funds

Connecting Europe Facility  

European Development Fund (EDF)

European Fund for Strategic Investments (EFSI)

European Investment Bank (EIB)

European Bank for Reconstruction and Development (EBRD)

Legislation

EU Emissions Trading Scheme

State aid rules

- Market design 

 ... financing fossil fuels through … 

Fossil fuel Infrastructure (e.g. gas pipelines, coal mining, high-carbon transport)

“Keeping it burning” (energy, power generation, ‘energy security’):

- project preparation and feasibility studies

- co-firing RES, “efficiency” of fossil fuel infrastructure, CHP,

- R&D, CCS research

RDI in unconventional Fuels (‘Other’ sources of energy)




 + Tremendous social costs of fossil fuel production and consumption

such as air pollution related pre-mature deaths, health costs and environmental degradation 

  

 

EU funds

 

      • European Structural and Investment (ESI) Funds 

ESI Funds is an overarching term used for a number of EU funds that deliver financial resources to EU Member States with the view to leveraging private financing and triggering more projects in sectors such as energy, agriculture and transport. ESI Funds include the European Regional Development Fund, the European Social Fund, and the Cohesion Fund [among others - the European Agricultural Fund for Rural Development, and the European Maritime and Fisheries Fund]. Funding through these different EU cohesion policy resource pools amount to approximately €346 billion, for the 2014-2020 EU budget period, the so called Multiannual Financial Framework. ESI Funds can serve as another tool to help translate the EU’s climate and energy commitments into concrete investments and projects.

Recent data and information on the plans and projects funded by ESI Funds illustrates that a large amount of investments are going to activities that undermine the broader objectives of the EU to decarbonise its economy. The data show that almost €1 billion has been earmarked for natural gas projects, while large-scale support has also gone to the transport sector, particularly roads.

 

      • Connecting Europe Facility (CEF)

The Connecting Europe Facility (CEF) aims to enhance and expand cross-border infrastructure, connections and territorial cohesion in Europe. The CEF also identifies tackling climate change as part of its overall objectives. It has a total budget of approximately €30.4 billion, of which €5.35 billion is earmarked for energy. Energy projects which are put on a list of so called ‘Projects of Common Interest’ (on the basis of criteria set out in the 2013 Energy Infrastructure Regulation) can benefit from CEF funding and a.o. streamlined approving procedures.

The CEF is providing favourable support to gas infrastructure and connections, above and beyond alternative measures for cross-border connections. For the years 2014-2015, almost €430 million of CEF funding was allocated to gas projects. It is envisaged that up to €800 million will be disbursed by the end of 2016; so far €210 million in funds have been approved for gas projects.

The growing financial support for gas infrastructure and connections in Europe presents a worrying trend in EU funding. On the one hand, the CEF is seeking to ensure security of energy supply, strengthen integration, and stimulate jobs. On the other hand, it is not adequately taking into account the deep decarbonisation pathway that the EU needs to take in order to avoid dangerous climate change.

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European banks

 

      • The European Bank for Reconstruction and Development (EBRD)

The European Bank for Reconstruction and Development (EBRD) has the mandate to promote transition to market economies and sustainable development in the countries of Eastern Europe, former Soviet Union, the southern and eastern Mediterranean as well as Mongolia and Turkey. The bank is owned by 65 countries from across the world, the European Union and its Member States and the European Investment Bank. To respond to challenges such as increased demand for natural resources and growing environmental concerns, in 2006 the EBRD established the Sustainable Energy Initiative with the aim of promoting efficiency and innovation in the areas of energy, water and materials. In 2013, the bank also adopted a new Energy Strategy which excludes financing for new coal power plants, with possible exceptions for Mongolia and Kosovo. In 2015 the EBRD Board agreed on the Green Economy Transition (GET) approach seeking to increase investments in sustainable energy and resource efficiency to 40% of its entire portfolio by 2020.

Current state of play

So far so good, but a recent report by CEE Bankwatch Network clearly shows that the EBRD is far from being a front-runner in sustainable investments, continuing to finance controversial fossil fuel projects which has increased some countries’ economic dependence on natural resource extraction.

For the years 2008 to 2015 fossil fuel investments amounted to over €15 billion; for the years 2013 to 2015, investments amounted to approximately €5 billion. Note that the figures just display support for exploration. This means support towards the discovery and potential expansion of oil, gas and coal reserves which is just one part of fossil fuel production. The figure does not cover all levels of fossil fuel production.

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EU policies and tools

 

      • The EU Emissions Trading Scheme

The EU Emissions Trading Scheme (ETS) aims to help the EU achieve its long-term greenhouse gas reduction goals more cost-effectively and is meant to encourage investments in low-carbon technologies. It receives little attention towards its role as a facilitator of support for dirty fossil fuels. While not being in the direct spotlight, the ETS also plays a role in prolonging the life of coal power plants and other fossil fuel use through ETS funding.

Current state of play

Firstly, most energy intensive industries receive their pollution permits for free. This is because they claim that the ETS would otherwise force companies to move their production abroad to countries with less ambitious climate measures to lower their production costs. There is no compelling evidence that EU’s climate policies are or will be forcing companies to move abroad. These free allowances represent a large subsidy for fossil fuel intensive industries.

Secondly, Member States can use their revenues from auctioning ETS pollution permits however they wish to. ETS Directive specifies that at least 50 % of auctioning revenues should be used for climate and energy related purposes. But there is no enforcement and what constitutes climate action is defined very broadly. Many governments choose to subsidize energy intensive industries that have high electricity costs. Germany has for example budgeted €756 million for indirect cost compensation in the 2013-2015 period. Compensating electricity intensive industries for their consumption of fossil fuel based electricity hampers the transition to an efficient, climate-friendly energy system as it reduces the incentive to purchase low-carbon electricity.

Thirdly, article 10c of the ETS Directive allows lower income Member States (Poland, the Czech Republic, Romania, Hungary, Slovakia, Bulgaria, Croatia, Estonia, Lithuania, Latvia) to hand out up to 40% of their ETS pollution permits for free to power plants. The hand-outs are made under the condition that those same power plants undertake efforts and investments to modernise their systems. Current article 10c investments have overwhelmingly benefited fossil fuel based plants. At the same time, the greenhouse gas emissions from power stations that have received support have been falling much slower than the emissions from all other EU power installations.

 

      • State Aid Decisions

State aid is a powerful tool through which governments have the ability to use state resources to support certain undertakings. Such interventions however, per definition, distort or threaten to distort competition and are thus generally prohibited. However, State aid can exceptionally be allowed in some cases, and the Treaty of the Functioning of the EU (TFEU) empowers the Commission to assess whether this is the case. The details around how these subsidies can be applied – including to what technologies and projects and on what conditions – are therefore regulated at EU level through State aid law as part of the European competition law.

In principle, Member States need to notify their intended State aid measures to the Commission’s DG Competition which decides whether the measure indeed is State aid and if so, whether it can be approved.

In principle, the European Commission assumes that there is competition in the EU’s markets and public finance is therefore subject to State aid rules. State aid has the promising potential to advance the EU’s climate and energy goals through supporting industries which drive the transition towards a low carbon economy, but at the moment it is often used to allow for continuing fossil fuel production and consumption.

Current state of play

The latest Commission proposal on State aid entitled Guidelines on State aid for environmental protection and energy 2014-2020 is an attempt to ensure coherence between State aid rules and EU’s climate and energy policies. A recent examination of these guidelines by an environmental law NGO ClientEarth however shows that severe gaps remain. The new guidelines lack appropriate recognition of the need to provide support for developing green technologies, while allowing Member States to give aid to ensure that there will always be a secure supply of power (see the chapter on capacity mechanisms below). Additionally, the definition of ‘energy from renewable energy sources’ opens up for support to co-firing of coal and biomass. Examples of when State aid is allowed for fossil fuels related energy projects include: closure aid for inefficient coal mines, regional aid for investments and new jobs which theoretically and legally can be given to coal mines, compensation for stranded assets in the electricity sector, if the service is of general economic interest (SGEI), and through rescue and restructuring aid in the energy sector.

 

      • Capacity Mechanisms 

Meeting the ambition set out in the Paris Agreement requires a rapid decarbonisation of the power sector – which needs to be fully decarbonized by 2050 – and the financial support that is provided to power generation. Capacity mechanisms are one form of such support. Capacity mechanisms are measures – or market interventions – taken to ensure that there is adequate capacity available at all times to produce electricity to ensure a secure electricity supply.

Capacity mechanisms take many different forms, but they generally offer payments to capacity providers on top of their income from revenues generated by selling electricity on the market. This is done as a means to prevent the shutdown of existing generation capacity or to incentivise investment in new resources. Capacity mechanisms have an impact on competition and they are therefore subject to EU State aid rules (see chapter on State aid above). The European Commission acknowledges that they risk to undermine the EU’s objective of phasing out fossil fuel subsidies.

Current state of play

A number of questions and concerns have recently arisen in relation to capacity mechanisms, namely, whether they are as necessary for security of supply as they are perceived to be by EU governments, and how their application may actually result in more subsidies for the fossil fuel sector through the back door which risks contradicting international, European and national climate objectives.

A European Commission report recently pointed out that Member States introduce capacity mechanisms without ‘proper and consistent analysis’ of their need. The report for example found that many Member States did not properly assess what would be the best way to increase security of supply. In addition, ODI asserts that the traditional approach to capacity mechanisms that focuses on the capacity to produce power is outdated. This approach fails to secure the flexibility needed to complement variable, weather-dependent electricity generation from wind and solar and risks to undermine decarbonisation. A review of recently introduced and proposed capacity mechanisms shows that this leads to unbalanced favouritism for fossil fuels, as opposed to low-carbon options to enhance security of supply.

Capacity mechanisms may also interfere with cross-border trade and competition, close national markets, distort the location of generation, and finally increase costs for all Member States.

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