15 EU states subsidise fossil-fuels more than renewables

In 2020, Finland, Ireland, Cyprus, Belgium, France, Greece, Romania, Lithuania, Poland, Bulgaria, Sweden, Hungary, Slovakia, Slovenia and Latvia all allocated more than the EU average on fossil-fuel subsidies — and all higher than renewable-energy subsidies.

Fossil-fuel subsidies accounted for €55-58bn per year from 2008 to 2019, but two-thirds of these subsidies (€35bn in 2018) were tax exemptions or tax reductions.

Industry, transport and agriculture are the sectors that have benefited the most from EU fossil-fuel subsidies.

However, according to the auditors' report, these subsidies can undermine the effectiveness of carbon price signals and distort markets, making clean and energy-efficiency technologies relatively more expensive.

More than a decade ago, G20 countries called for the end of fossil-fuel subsidies by 2020. But the EU and its member states only managed to commit to phasing them out by 2025 — a move that will be "a challenging social and economic transition," EU auditors also warned.

Currently, only a dozen EU countries have indicated their intention to phase out some of the existing fossil-fuel subsidies — with six countries having a specific timeline to phase them out.

In their report, the auditors argued that the 'free allowances' under the cap-and-trade EU carbon market can also be considered fossil-fuel subsidies - as they mostly cover emissions from fossil-fuel use.

These free permits are designed to help heavy industry, aviation and, in some member states, the electricity sector, remain competitive against rivals based in non-EU third countries, but previous reports have cast doubt on their efficiency.

"Free allowances…have slowed the uptake of low-carbon technologies," the report said, pointing out that the European Commission should better target these permits, especially if the system is to be prolonged for another decade.

They also warned national capitals that all types of fossil-fuel subsidies can create unfair treatment for some sectors, triggering resistance to the transition towards a greener economy, such as the so-called 'yellow vest' protests in France.

Lack of consistency

Meanwhile, the report notes that one challenge for the bloc's environmental action is to ensure consistency between energy taxation and climate objectives — upholding the so-called 'polluter pays' principle.

For example, coal is taxed less than natural gas, and some fossil fuels are taxed significantly less than electricity which can be produced by renewables.

In practice, this means the minimum tax rate can be applied to the most-polluting energy source.

But new rules, currently under discussion, would introduce fresh taxes based on environmental performance, eliminate the favourable treatment of diesel over petrol, and remove the tax exemption of kerosene for air passenger flights.

The commission's own evaluation of its taxation directive concluded that existing rules do not support the uptake of low-carbon alternatives and do not provide legal clarity for some new energy products.

It also added that the minimum taxation rates set in the directive no longer fulfil its initial objective - to reduce differences in national energy-tax levels.

While some countries have imposed high taxes, others keep taxes for fuel close to the minimum, generating distortions in the internal market, EU auditors said.