EU must 'phase out' fossil fuel subsidies and back renewable energy

The EU should send strong and clear signals to markets in order to shift them towards a low carbon economy, says Martin Siecker.

By Martin Siecker

04 Apr 2014

In various strategies and roadmaps, the European Union has committed to transform itself into a 'green' resource efficient and low carbon economy by 2050. This will have to include a major expansion of renewable energy generation and a substantial phasing out of coal.

Some progress has been made, but if the EU is to achieve its objective, it must put its money where its mouth is and speed up the process considerably. Swifter progress needs the right combination of a strong regulatory framework and market-based instruments, such as environmental taxes.

Prospects for an ambitious regulatory framework do not look good since the European commission has tabled a weak 2030 climate and energy package, where the target for renewable energy generation is not enforceable and energy efficiency is not mentioned at all.

Moreover, a lone regulatory framework is not enough. Regulation means nothing if market forces are pointing in different directions. Here the legislator must provide the right signals with market-based instruments to incentivise the shift towards a green economy.

"Europe currently imports over €500bn worth of gas and oil, in part from politically unstable regions. Replacing fuel imports by low carbon energy generated in the EU would increase the resilience of the European economy and help keep value chains in Europe"

In an opinion of 25 March 2014, the European economic and social committee states that the use of market-based instruments in the EU is not sufficiently consistent and coherent at present. EU member states do not fully exploit the opportunities that a transition to a low carbon economy can offer for innovation, the modernisation of European industry and boosting employment.

Despite the success of environmental taxes in some member states, environmental tax reform does not live up to its full potential, bringing a broad change in fiscal policies. Revenues from the eco-taxes which have been introduced by member states are even declining. In the ongoing economic and fiscal crisis, the political will for a paradigm shift in tax systems is lacking. This is clearly a missed opportunity.

If climate action commissioner Connie Hedegaard's motto "tax what you burn, not what you earn" is put into practice and tax burdens shift from labour to resource use, labour costs for employers will be reduced and this will facilitate the creation of new jobs, not only in "green niches" but across many economic sectors.

Energy pricing has become a sensitive issue in the current crisis and greening the economy is perceived to be a burden on recovery rather than part of the solution. However, this is far from the truth. Europe currently imports over €500bn worth of gas and oil, in part from politically unstable regions. Replacing fuel imports by low carbon energy generated in the EU would increase the resilience of the European economy and help keep value chains in Europe.

It is unacceptable that environmentally harmful activities are still being subsidised in the EU, both through public budgets and 'external costs' on health and the environment which are not included in the pricing of the products.

The international energy agency calculates that subsidies for fossil fuels worldwide amount to €382bn ($523bn) and calls these subsidies "public enemy number one". At the EU level, fossil fuel subsidies amount to €68.8bn annually, including €26bn in direct subsidies and up to €42.8bn from member states and citizens to compensate for the negative social and health impacts.

Nuclear power plants receive total subsidies of €35bn in the EU, not including the costs of covering accident risks and disposal of waste. It is high time for the EU and member states to put into practice the commitments they made to phase out environmentally harmful subsidies and ensure a level playing field for renewable energy.

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