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The EU’s taxation policies allow more polluting energy sources to have a tax advantage

The European Union’s current tax levels do not reflect the extent to which different energy sources pollute, suggests the European Court of Auditors in its latest review which outlines how energy taxes, carbon pricing and energy subsidies contribute to achieving the EU’s climate objectives.

According to the review, even though renewable-energy subsidies quadrupled over the 2008-2019 period, fossil fuel subsidies have remained relatively constant over the last decade. This is despite commitments from the European Commission and some Member States to phase them out.

Ensuring consistency across the EU stands out as a clear challenge in the review. The auditors note that under the current Energy Taxation Directive, more polluting sources of energy may have a tax advantage compared to more carbon-efficient ones. For instance, coal is taxed less than natural gas, and some fossil fuels are taxed significantly less than electricity.

Moreover, while a majority of Member States impose high taxes on fuels, several others keep taxes close to the minimum established by the Directive which poses risks of distorting the internal market. Thus, low carbon prices and low energy taxes on fossil fuels increase the relative cost of greener technologies and delay the energy transition.

Overall, Member States’ subsidies for fossil fuels amount to over 55 billion euros per year, and fifteen Member States spend more on fossil-fuel subsidies than on renewable energy subsidies.

The auditors note that phasing out fossil-fuel subsidies by 2025, a goal to which the EU and its Member States have committed will be a challenging social and economic transition. Perception of unfair treatment for some groups or sectors may result in resistance to the transition towards a greener economy, warns the review.

The impact of energy taxation on households can be significant too and result in the pushback against energy taxes. At present, the amounts that households spend on energy, including heating and transport, vary considerably. The spending of the poorest households in Czechia and Slovakia can be more than 20 per cent of their income.

To alleviate the risk of rejection of tax reforms, the auditors recommend reducing other taxes and applying redistribution measures, while ensuring greater transparency and communication about the reasons for reforms.

“Energy taxation, carbon pricing and energy subsidies are important tools for achieving climate goals. The main challenge, in our opinion, is how we strengthen the links between regulatory and financial measures and find the right mix between these two”, underscored Viorel Ştefan, member of the European Court of Auditors responsible for the review.

“With our review, we aim to contribute to the discussion on energy prices and climate change, and in particular to the upcoming debate around the proposed revision of the Energy Taxation Directive”, he concluded.


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