EN34 Energy Subsidies

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Energy subsidies can be either beneficial or damaging to the environment. Damaging subsidies are those that lower the price of behaviour that is detrimental to the environment, thus encouraging excessive energy consumption, or making the cost of more environmentally harmful fuels lower relative to those that are less harmful. In contrast, subsidies that are beneficial to the environment improve the competitiveness of environmentally sound practices by reducing their price relative to those that damage the environment.

The European Environment Agency (2004) has undertaken a detailed analysis of energy subsidies for a single year, 2001. The review indicates that total 'on-' and 'off-budget' subsidies (excluding external costs) are estimated to be in the order of 29 billion Euro a year for the EU-15 (the definition of 'on-budget' and 'off-budget' subsidies is defined in the note to Figure 1 and also in the Metadata section). This figure is indicative, due to the lack of consistency of data across countries and of assumptions made.

In general there is a slight trend in reduction of 'on-budget' subsidies in the EU, mainly following processes of deregulation, privatisation and the opening of energy markets to competition. However, this has been balanced by an increase in 'off budget' subsidy support as governments have used fiscal measures rather than direct capital grants to support energy production and consumption. Total public expenditure on energy Research and Development declined by 14 % between 1990 and 2004 (including EU level funding). The role of the private sector in R&D is also significant, especially in the development and commercialisation phases of new technologies, but has not been included in the indicators due to a lack of reliable data.

Figure 1 shows the on- and off-budget subsidies by fuel. For that purpose, subsidies directed to the production and consumption of electricity (EUR 6.7 billion) was attributed to the fuels used to generate electricity according to their shares in production. Solid fuels then received the largest share of total subsidies in 2001, with EUR 13 billion evenly split between 'on-' and 'off-budget' subsidies. Oil and gas received in excess of EUR 8.7 billion, of which approximately 97 % was in the form of 'off-budget' subsidies. Renewable energy received the third largest off-budget subsidy of EUR 5.5 billion, while nuclear power received approximately EUR 900 million. Some support was provided to energy conservation; however, the degree of influence on the improvement in energy consumption intensity is difficult to identify.

Focusing on public expenditure on energy R&D, the major share was allocated to nuclear fission and fusion (44 % in 2004). While the overall share for renewables was still relatively small in 2004 (21 % excluding EU level funding), it had increased significantly over the period. France had the highest energy R&D expenditure in 2004 (26 % of the total, excluding EU level funding), but the majority, 78 %, was allocated to nuclear (fusion and fission) R&D.

Fossil fuels were the main beneficiaries of energy subsidies in 2001, despite the pressures that these fuels place on the environment. EU average annual subsidies for fossil fuels accounted for almost 75 % of total EU energy subsidies. On- and off- budget support to the coal industry is the single most important funding regime in the EU-15. State financing to coal mines was commonplace throughout the last century, and exists today in a more rationalised form to protect high-cost domestic industries from competition with cheap foreign coal imports. On-budget subsidies continued in 2001 to the coal industries in Germany (over EUR 4 billion), Spain (over EUR 1 billion), and the UK (circa EUR 0.1 billion), whereas subsidies in other countries, such as Belgium, France, Ireland, the Netherlands and Portugal have more or less ceased.

Expenditure on oil and gas reflects expenditure predominantly in France, the Netherlands, and the United Kingdom whereas expenditure on coal production is highest in Finland, Germany, the Netherlands, Spain and the United Kingdom. There is little aid to investment in the oil sector, reflecting the fact that the bulk of oil reserve development is occurring outside Europe. The industry across Europe is largely privatised and receives no on-budget aid for oil production, transport or storage. Italy, the Netherlands and the United Kingdom provide the highest level of support to the oil and gas sector. In the Netherlands, preferential tax treatment under the regulatory energy tax for medium and large users of gas is significant (estimates range from EUR 0.9 to 2.4 billion). The United Kingdom supports oil and gas with reduced rates of VAT (5 %) on domestic oil and gas (circa EUR 1.4 billion), while Italy allows reduced VAT rates (10 %) on domestic gas (circa EUR 0.9 billion).

The amount spent on R&D associated with fossil fuel production declined by 34 % (in constant prices) during the period 1990-2004, and its share of total energy R&D dropped from 5 % to 4 %. Most R&D associated with fossil fuel production is still spent on coal production, but this share is slowly decreasing and the proportion spent on oil and gas has increased. In 2001, nuclear power was the least subsidised form of energy, accounting for 8 % of total subsidy support. The on-budget support to nuclear energy comes from R&D grants by Member States (mainly France, Germany and Italy) and the European Community. These figures exclude the potential cost of not having to pay for full-liability insurance cover for a critical nuclear accident or fuel incident since commercial and state liabilities are limited by international treaty and such risks are too large to be commercially insurable. However, there are difficulties with producing an estimate that accurately reflects the risks associated with nuclear power. They also do not include external costs associated with the nuclear fuel cycle. In 2004, nuclear R&D expenditure still accounted for approximately 51 % (in constant prices) of EU total energy R&D spending, despite a decline since 1990 (where it accounted for 53 %). France has the highest absolute expenditure on nuclear Research and Development and the largest share of spending, 78 % in 2004 (constant prices).

Support for renewable energy, which is on balance considered environmentally beneficial, has increased steadily between 1990 and 2001, through the introduction of regulatory support mechanisms, such as fixed feed in tariffs, competitive tenders and purchase obligations. Support for renewable energy is now well established across the EU-15, as indicated by the estimate of it taking 19 % of all on and off-budget subsidies in 2001. Every Member State provides a combination of price support through feed-in tariffs, obligations or competitive tender, together with a range of capital subsidies and fiscal mechanisms.

In 2001, total levels of support were greatest in Germany and Italy, where over EUR 1 billion was provided, mainly in the form of feed-in tariffs. France provides tax exemptions for biofuels from oil excise duties. It can be expected that subsidies for the renewable industry will fall as costs decline and the technologies mature (with the exception of large hydro, which is already considered mature). R&D expenditure on renewables has risen substantially (by 68%) between 1990 and 2004, increasing its share of total funding from 9 % to 20%.

Research and development expenditure on energy conservation (not including combined heat and power) declined by approximately 33 % in absolute terms between 1990 and 2004 (in constant prices). However, due to the decline of total Member State R&D expenditure, its share of total funding has increased from 10 % to 13 % over this period. The Netherlands, Italy, Sweden and Germany have the highest absolute R&D spending on energy conservation together accounting for 62 % of total Member State spending in this category in 2004 (constant prices). Energy conservation is the highest percentage share of energy R&D spending in Finland and the Netherlands (25 % and 23 % respectively in 2004, in constant prices).

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May 22, 2007 - EN31 Energy prices