The European Commission must produce an effective framework to tackle fossil fuel subsidies, writes James Nix.
James Nix is Director of Green Budget Europe, an expert platform on environmental fiscal reform.
There is a growing global awareness of the real cost of fossil fuels. Last week, the International Monetary Fund (IMF) estimated that global fossil fuels subsidies will reach $5.3 trillion in 2015 (6.5% of the global GDP).
The IMF study shows coal and oil to be the most heavily subsidised energy sources. In addition to encouraging CO2 emissions, these subsidies raise air pollution, which inevitably leads to poor health and premature deaths. The number of premature deaths from air pollution in the EU stands around 450,000 annually, running to tens of thousands per year in larger member states.
At least until very recently, the European Commission had been to the fore in addressing fossil fuel subsidies while also urging other governments to tackle fossil fuel subsidies.
In 2013, the Commission wrote to the G20 asking it to “make progress on phasing out fossil fuel subsidies, incorporating green growth policies in structural reform agendas, generating climate finance, improving the transparency of commodity markets, and promoting investment in energy infrastructure”.
Sadly, just days before the IMF study was released, the European Commission decided to stop asking member states to tackle fossil fuel subsidies in issuing its annual recommendations on economic governance on 13 May.
Commission officials had advised that 11 member states be asked to tackle their fossil fuel subsidies, but the Commission itself issued no recommendations on the topic. Instead, it said that fossil fuel subsidies will be taken up as part of the planned Energy Union. However, the governance structure and timeline for the Energy Union proposal will only become clear next year – and operational some time after that – leaving a policy vacuum at a crucial time for energy and climate policy.
This vacuum throws a question mark over the credibility and accountability of the Commission ahead of the 2015 Paris Climate Conference at the end of the year, where the EU may find itself in the awkward position of having stressed the need to reform fossil fuel subsidies but moving backwards itself.
To heal this, the Commission needs to quickly detail how fossil fuel subsidies will be tackled, bringing this process forward into 2015, rather than risking embarrassment at Paris.
Collaboration between the Commission and member states should form the essence of the plan to tackle fossil fuel subsidies. This could be achieved by identifying the member states that most need to end their fossil fuel subsidies, and subsequently working out an Action Plan between the Commission and Member States governments to phase out these subsidies. (In July the IMF is due to publish the country-by-country breakdown for fossil fuel subsidies from its recent report.)
The Commission needs to act quickly to avoid raising two major risks. First, the EU Commission is mandated to ensure member state economies move in parallel. If, however, some member states tackle fossil fuel subsidies while others don’t, the inevitable result is energy divergence followed very closely by economic divergence. Put simply, to reduce energy dependency and achieve a EU energy market, fossil fuel subsidies need to be tackled in a coherent way across the EU.
Second, investor certainty is vital, and for this to occur, the Commission must stand by its plans to transition the EU to a resource efficient, low input economy. The alternative – an apparent start / stop approach to tackling fossil fuel subsidies – does more than send out contradictory signals: it jeopardises much-needed momentum and throws needless speed bumps in the path of transition.
Moving along similar lines, the challenge fossil fuel subsidies pose to the expansion of renewables is something stressed by the IMF. Essentially the report begs the questions: wouldn’t it be more logical and sustainable to invest in renewable forms of energy? And considering the current low oil price, isn’t it a good time to examine taxes or other price mechanisms so that fossil fuels pay more for the harm they cause to health and climate stability?
Working collaboratively, the Commission and member states have much to gain in decreasing fossil fuel subsidies, particularly in terms of public debt avoided and benefits to taxpayers. Globally, the IMF found that the elimination of post-tax subsidies in 2015 could raise government revenue by $2.9 trillion, cut global CO2 emissions by more than 20%, and halve premature air pollution deaths.
There is a bright future – but the European Commission must stay the course. That starts with producing an effective framework to tackle fossil fuel subsidies in 2015.