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Fossil fuel subsidies and the new EU Climate and Energy Governance Mechanism

Working Papers N°09/2016. Iddri, 2016. 20 p.

There is currently no dedicated process to track the extent of fossil fuel subsidies, nor to ensure that Member States phase them out. This situation is inconsistent with the European Union’s stated decarbonisation and energy efficiency dimensions under the Energy Union. The EU is therefore in need of an alternative process for tracking and ensuring the phase-out of fossil fuel subsidies by the Member States. The new Energy Union governance mechanism presents an opportunity for creating this alternative.

This publication received financial support from KR Foundation.

Highlights:

  • PHASING OUT FOSSIL FUEL SUBSIDIES IS ESSENTIAL FOR DECARBONISING EU ENERGY SYSTEMS

Providing the right price signals is essential part of the policy mix that is needed to achieve Europe’s climate policy goals. Phasing out fossil fuel subsidies in the EU is an important part of aligning energy prices with the EU’s climate and energy goals. Depending on how they are measured, combined fossil fuel subsidies in the EU range from 39 to over €200 billion per annum (European Commission, 2014). They therefore constitute a significant source of incoherence between the EU’s climate mitigation and fiscal policies for energy.

  • THE REMOVAL OF FOSSIL FUEL SUBSIDIES HAS LARGELY STALLED IN EUROPE

However, there has recently been mixed progress in addressing fossil fuel subsidies in Europe. For instance, under the Europe 2020 Strategy, Member States had committed to begin developing plans for phasing out fossil fuel subsidies by 2020. Progress on implementing these plans was supposed to be monitored under the European Semester. However, the decision was taken to remove the focus on energy and fossil fuel subsidies from the European Semester in 2015. As yet, no new system for governing the phase-out of fossil fuel subsidies has been advanced, leaving the question of fossil fuel subsidy reform in limbo.

  • THE ENERGY UNION’S “NEW GOVERNANCE MECHANISM” CAN PUT IT BACK ON THE AGENDA

The advent of the EU’s Energy Union project creates an opportunity for putting the phase-out of fossil fuel subsidies back on track in Europe. This could be done by including requirements for national goal setting on specific kinds of fossil fuel subsidies in a dedicated sub-section of the National Climate and Energy Plans. Progress on implementation should also be tracked through the biennial reporting process focusing on implementation of national plans. The door to reinserting specific climate and energy issues into the European Semester should not be closed either. In some instances there may be a need to bring finance ministers into the discussion on implementation of fiscal policy for climate and energy.