Phasing out public financial flows to fossil fuel production in Europe

ABSTRACT

Under the Paris Agreement, the world’s governments, including European governments and the European Union (EU), are committed to a low-carbon transition, with a goal of net zero emissions in the second half of this century, while ‘making finance flows consistent’ with that pathway. In addition, the EU has called upon Member States to phase out their support to fossil fuels by 2020. Progress towards this goal, however, has been slow. Our research finds that 11 countries (accounting for 83% of the EU’s emissions) and the EU’s budget and public banks still provide at least €21 billion per year of support for the production of coal, oil, and gas (with €2.6 billion of this amount allocated to the transition away from coal). This is via three distinct financial flows: fiscal support via budgetary transfers and tax breaks; public lending to the sector; and capital investment by fossil fuel-related state-owned enterprises. The financing captured by this figure is a minimum estimate due to lack of transparency in the data provided by governments. We argue that it is vital for European governments to fulfil their promises to phase out subsidies and other financial flows to fossil fuels to meet their climate goals. This must start with greater transparency around the support being provided and phase-out plans, including annual reporting on support for production and consumption of fossil fuels, in line with the EU’s recently strengthened Energy Union Governance framework for 2030. This entails the inclusion of national policies, timelines, and measures aimed at phasing out financial support to fossil fuels in Member States’ National Energy and Climate Plans (NECPs).

Key Policy insights:

• Between 2014 and 2016, 11 European countries and the EU public banks and budget provided at least €21 billion per year of support for the production of coal, oil, and gas.

• Meeting commitments to phase out subsidies towards the production of fossil fuels is critical for meeting climate goals.

• EU Member States insufficiently reported on their fossil fuel subsidies in their draft NECPs.

• Greater transparency and reporting on all fossil fuel financing is a key first step towards phase-out.

KEYWORDS:

• Climate change
• climate policy
• energy policy
• fossil fuel subsidies
• public finance
• production subsidies

Acknowledgements

The research was conducted by the Overseas Development Institute (ODI) and Climate Action Network (CAN) Europe, with supporting research conducted by CEE Bankwatch Network, Counter Balance and Friends of the Earth Europe.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Stranded assets, in the context of climate change, are: fuel energy and generation resources that, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (i.e. meet the company’s internal rate of return), as a result of changes in the market and regulatory environment associated with the transition to a low-carbon economy (CTI, 2014).

2 Carbon lock-in is understood to mean that once certain carbon-intensive development pathways are chosen and capital-intensive investments are made, fossil fuel dependence and the carbon emissions that come with it can become very hard to change, making a transition to lower-carbon development pathways much more difficult and increasing the risk of exceeding climate limits (Erickson et al., 2015). This often happens because the upfront investments that are made become sunk costs. Therefore the infrastructure will stay operating if it meets variable costs rather than having to recover the full economic costs of an investment.

3 The EU defines state aid as ‘an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities’ (European Commission, n.d.-a).

4 The EU has not set an EU-wide timeline for ending SOE support to coal mining, nor for support to coal by all public finance institutions (either domestically or internationally).

5 These are: the Czech Republic, France, Germany, Greece, Hungary, Italy, the Netherlands, Poland, Spain, Sweden, and the United Kingdom.

6 Emissions data is from CAIT Climate Data Tracker, based on CO₂ emissions in 2013 (WRI, 2015).

7 The proposed definition, developed by the United Nations Environment Programme (UNEP), International Institute for Sustainable Development (IISD), and the Organisation for Economic Co-operation and Development (OECD), includes all fossil fuel subsidies, splitting them into four categories:

1. Direct transfer of funds – payments made by governments to individual recipients

2. Induced transfers – energy prices regulated by government

3. Tax expenditure, other revenue foregone, and underpricing of goods and services – for example, tax reductions, allowances, rebates or credits

4. Risk transfers – direct involvement of a government in the fossil fuel industry, by taking on risks on behalf of parts of the industry.

8 Since the publication of the original research for this report, the OECD has released an updated Inventory of Support Measures for Fossil Fuels and a Companion to the Inventory (OECD, 2018).

9 All conversions were made using the average annual rates, as provided by the Canadian Foreign Exchange website at http://www.canadianforex.ca/forex-tools/historical-rate-tools/yearly-average-rates

10 In 2010, the Council of the EU decided to allow the continuation of state aid, but on condition that the mines receiving state aid close by December 2018 (Council of the European Union, 2010). Aid to cover operational losses can be provided and must be based on an agreed closure plan. This implies that operational aid to uncompetitive coal mines should have been phased out by 2018. It is too early to tell whether governments have complied. Aid to cover ‘exceptional costs,’ to mitigate social costs, such as early retirement schemes or for site rehabilitation, must be phased out by 2027.

11 Please note that these examples include countries not in the subsidy inventory, but discussed here for illustrative purposes. For a list of all publicly available NECPs, see European Commission (n.d.-b).