The Organisation for Economic Co-operation and Development (OECD) has published data highlighting subsidies paid to support fossil fuel consumption in its 34 members. The report provides a country-by-country breakdown of support policies and tax measures and it is hoped that the data will improve transparency on energy prices and trigger debate on meaningful subsidy reform.
With the fallout of the economic crisis still being felt and with national governments in austerity mode, it has become a challenge to find cost-effective measures to reduce greenhouse-gas emissions and transfer to a sustainable energy future. Whilst then need for green growth is recognised, there is a mentality in many quarters that renewable energies are too expensive and that too much is given to their support in subsidies. This goes against the pledges of the members of the OECD who, in 2009’s Declaration of Green Growth’ vowed to reform policies which may be environmentally damaging or stand in the way of the transition to a green economy. Despite this, fossil fuel subsides remain in place in many of the OECD nations.
In 2011, German taxpayers gave €2billion to coal producers, whilst Poland has paid €7billion between 1999 and 2011. In total, there were 550 measures to support fossil-fuels in the 34 members of the OECD, worth an estimated $55-90billion per year from 2005 to 2011. Lack of information makes it difficult to reform fossil-fuel subsidies and find suitable policy answers to long-term energy cost and security questions. The International Energy Agency’s ‘World Energy Outlook 2012‘ estimates that fossil fuel subsidies for consumers amounted to $523 billion in 2011, up 30% on 2010 and six times more than subsidies to renewable energies.
From a political economy perspective, those who would lose out from attempts to reform the energy system would feel an immediate adverse effect, whilst benefits would take time to show and would be spread more thinly throughout the population. Those who seek to block reform to the system of energy subsidies are currently both very powerful and very well organised.
However, reform is not impossible. In 1999, Germany was paying out €5billion to coal producers, now down by €3billion, whilst in Poland, much of the money spent on gas is related to historic liabilities and since 2011, it has been required to follow EU regulations that mean state-aid can only be paid to close mines, treat health problems and address environmental problems created by past mining.
The OECD inventory takes account of measures using a PSE-CSE framework (Producer Support Estimates – Consumer Support Estimates) and notes that there are a variety of reasons for policies, and many have social benefits, (for examples, winter fuel allowances which are paid to pensioners). The types of measures and degree of state involvement vary across the EU, as illustrated by differences between the ‘Big Three’:
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France maintains substantial ownership stakes in privatised electricity and natural gas companies, but has focused its spending on nuclear facilities (which now makes up 41% of electricity production). Mechanisms for directing support to specific fuels and categories of end user include partial or full exemptions, or refunds, on VAT and excise duties on oil products. Social tariffs are available to residential customers on low incomes.
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Germany has been heavily subsidising deep coal mines operated by RAG Deutsche Steinkohle AG, as production costs are well above revenues. In 2007, a roadmap was agreed to ensure subsidies are fully removed by 2018, with financial protections in place for early-retiring miners. The main features of the energy tax code relating to energy consumption include tax exemptions, reductions, rebates and (partial) refunds for particular fuels and sectors.
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The United Kingdom does not implement any energy-price controls and prices are set freely by the market, but the Office of Gas and Electricity Markets (Ofgem) regulates access charges to electricity and gas networks. Energy sales are subject to VAT at 20%, excise taxes and a Climate Change Levy (CCL), but VAT is charged at only 5% to domestic fuel and power, and there are many discounts and exemptions to the CCL, depending on the source and use of fuel. A winter fuel allowance is paid to pensioners to cover costs of heating.
The report does not make judgements on the validity of support measures, but does provide evidence of how to successfully implement reforms:
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Improve availability of data on energy subsidies and support measures to trigger debate on which support measures are essential and which are unessential;
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Ensure that the removal of subsidies does not disproportionately hit one section of society over others, especially residential energy-users with low incomes;
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Integrate subsidy reform into broader structural reforms, such as privatisation and market liberalisation;
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Signal that the government is committed to compensating vulnerable groups, especially through beneficial reinvestment of savings.
The full report, ‘Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013’, is available to read online, or buy through OECD publishing.
Click here for access to individual country files.