EN34 Energy Subsidies
Assessment made on 01 Nov 2008
ClassificationEnergy (Primary theme)
DPSIR: Driving force
- ENER 034
Policy issue: Are environmental costs better incorporated into the pricing system?
Energy subsidies in the EU-15 have been estimated to amount to over EUR 29 billion in 2001 with almost three quarters oriented towards the support of fossil fuels, despite the pressures and threats that these fuels place on the environment. However, there has been a significant increase in the subsidies and support mechanisms available for renewable energies. Total funding for energy research and development has increased by approximately 5% over the period 1995 to 2005.
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 has been 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.
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.
Total public expenditure on energy Research and Development increased by 5 % between 1995 and 2005 (including EU level funding under the 6th Framework Programme averaged over 5 years from 2002 to 2006). 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. EC funding for energy-related activities under the 7th Framework Programme1, running from 2007-2013 will rise to around €1016M euros per year from €424M of which €388M is for non-nuclear energy research (all figures are in constant 2006 prices).
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 subsidies is 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 has almost doubled from 1995 to 2005 (excluding EU funding), and its share has increased from 5% to 9%.
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 reflects accurately the risks associated with nuclear power. The estimate also does not include external costs associated with the nuclear fuel cycle. In 2005, nuclear R&D expenditure still accounted for approximately 45 % (in constant 2006 prices) of EU total energy R&D spending, despite a decline since 1995 where it accounted for 55 %. France has the highest absolute expenditure on nuclear Research and Development and the largest share of spending, 62 % in 2005 (constant 2006 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 37%) between 1995 and 2005, increasing its share of total funding from 11 % to 15% (excluding EU funding).
R&D expenditure on energy efficiency and conservation (not including combined heat and power) declined by approximately 19 % in absolute terms between 1995 and 2005 (in constant prices), leading to a drop in share from 10% to 8% in total R&D (excluding MS funding). High shares of expenditure (>25% of total MS spending) are seen in Austria, Finland, Ireland, Portugal and Sweden.
Biofuel support only accounted for a small component (<6%) of the 2001 estimate of renewables subsidies in Figure 1 (e.g. minor tax exemptions in France and the Netherlands). Support for biofuels has been increasing rapidly in more recent years given Directive 2003/30/EC on Promotion of the use of biofuels and other renewable fuels for transport, and will likely increase further in future given the proposed biofuels target of 10% by 2020 in the new climate package (COM(2008)16, 17 and 19). A recent study (GSI, 2007) of EU Member States involved in the production of ethanol and biodiesel estimated that total support in 2006 was around €3.7 bn covering a range of on- and off-budget subsidies. The authors considered that this was likely to be an underestimate.
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