1.5 week ago, during the presentation of the “Next Generation EU” fund, you made clear that digital and green investments will be prioritised in the national plans for recovery of the corona crisis, and that these plans will be included in the European semester process. In addition, the Just Transition Fund — that focusses on those regions that are most heavily dependent on fossil fuels — will be increased from €7.5 billion to €40 billion. However, guarantees with which the Commission “oblige” Member States to invest in green energy and NOT in fossil energy seem to be lacking, especially since the recovery proposals still allow countries to support fossil fuels. So, without any guarantees, targets, deadlines and sanctions for the recovery funding, how can you hope to progress towards climate neutrality?

Well, because they will have to submit the plans. If they want things funded out of Next Generation EU, they have to submit the plans and we will apply the criteria you mentioned on the plans. And of course, if they are not willing to do that, then they won’t, but then they won’t get funding out of Next Generation EU.

I believe there is much more willingness to go into that direction that I had myself anticipated in the middle of the corona crisis. I think a lot of that is linked to how the private sector is reacting — especially how the banking sector is reacting. Because there is a huge huge fear, especially in the energy sector, to put money in what will soon become stranded assets. So there is a strong push towards it.

I can understand the question; how can you force them to do this? Well, at the end of the day there is very little we can force Member States to do across the board, certainly not if things are in a shared responsibility between what you need to do at the EU level and at the national level. But I am rather optimistic. There will be a lot of discussion about our plans, there will be a lot of discussion about the relationship between loans and grants, the increase of the MFF. I see all of that, but the principle that we recover on the basis of the Green Deal and digitisation and that we — in submitting the plans — commit to the ‘do no harm’-principle, is already more than I had hoped for and this has not been contested by Member States.

I know that there are different views in different Member States, but by and large the understanding that we need to use this crisis also not to forget the climate crisis but to make the necessary steps to get us to this new economy, is stronger than I had anticipated. Perhaps I was too pessimistic, but the advantage of being a pessimist is that you either are proved right or are proved wrong, and (….).

One particularly contentious issue is the subsidising, or you may call it supporting of the consumption and exploration of fossil fuels. According to the figures of the OECD and many Member States, at least € 150 billion per year of tax payer money is spent to increase consumption and exploration of fossil fuels. Do you think it is possible to achieve the agreed reduction of emissions by 40% in 2030 (or even 55% if the higher goal is accepted) without phasing out or cutting these subsidies?  

No, but they are going to be phased out. You already see that development happening. I think nobody, after this crisis or in the middle of this crisis, sees any future in coal. That is already one thing, and I think the phasing out of coal is going to happen quicker than anybody had anticipated. It is going to be interesting to see what is going to happen in Germany. My prediction is that it is going to be faster than before.

Also, we talk a lot to the energy sector. I had a whole host of meetings in the last couple of months, and it is clear that they want to redirect their investments. The financial sector and the banking sector are pressurizing them as well because they are afraid that these will become stranded assets. And by the way, investing in sustainable energy is just a better business decision right now. So I think we will see a shift.

Where we will see a lesser shift is in natural gas, I think. I believe that certainly in countries that today depend heavily on coal, shifting towards renewables will have an intermediary step in natural gas. If we could accompany that with a strategy that will allow the infrastructure that will be used for that to also be available for hydrogen, then at least we would kill two birds with one stone. 

I think there is a misunderstanding; you talk about investments in exploration, but we mean these massive subsidies in the form of tax exemptions or reduced electricity prices. There are many different ways by which Member States increase the consumption of fossil fuels and our impression is that this is the elephant in the room that nobody wants to talk about.

Again, I don’t want to sound overly optimistic, it is not my nature, but I have to say, these tax regimes are being revisited by almost every Member State. Everybody is looking at this now. Sharper choices will have to be made.

That some Member States are afraid of energy poverty is something we should also be concerned about. As soon as the impression is that some are trying to exploit, that the transition to green energy is something for rich people and poor people will suffer terribly, then the political momentum for sustainability will evaporate very quickly.

So we have to make sure we address the issue of energy poverty, but no longer by subsidising the consumption of fossil fuels.

You will have to see a shift in energy taxation and European legislation is long overdue in this area. The last revision of the Energy Directive was 17 years ago, so we have to look into this also s and make proposals in the near future.

Your premise is correct, there is still a lot of fiscal stimuli for the consumption of fossil fuels, but my contention is that this is not something that is sustainable also in political terms. Things are changing quite quickly at the EU level, we will make proposals in that direction, but I see also a shift in thinking at the national level.

Where I see the biggest problems obviously is in those countries where the risk for energy poverty is biggest and where the dependency on coal especially is also the biggest.

Our impression also is that the Commission does not explicitly address this jungle of subsidies which supports fossil fuel consumption. It is mentioned in the declarations for the Green Deal, but nobody talks about this enormous amount of money that is actually escalating climate change.

Well I have been talking a bit about it, perhaps not vocally enough and I take note of that and learn from what you are saying and talk a bit more about it. We will have to change the fiscal systems. I have been advocating that in my electoral campaign and I came back to that now in this position, also in the terms in our sustainable energy directive, the energy directive — that we have to make some changes there.

Perhaps it is a too technical term but we have been looking at our fiscal system to support the transition to sustainable energy. This is also something my colleague [Executive Vice President, Valdis] Dombrovskis has been talking about a lot, so you will hear a lot from the Commission in the next couple of years.

The Regulation on the Governance of the Energy Union obliges all Member States to report their subsidies and support schemes and even to present a plan on how to phase them out. But we found out that almost all Member States, at least those that have already delivered their plans, did not comply with this legal obligation. Either they did not list anything at all, or they even denied having subsidies. Or, for example, when they report their subsidies quite well, like Italy, they did not present a plan to phase them out. How will you deal with this collective refusal to comply with existing legislation?

Well, let’s see what happens when we have determined the goal for 2030, which will be in September. It is going to be between -50% or -55% as compared to 1990.

Let’s assume it is going to -55%. That means national plans will have to be looked at again in great detail, and then again the fiscality, the taxonomy and the support for the energy sector will have to be looked at. Then the Commission will revisit the National Plans.

I think you are absolutely right to put the finger on this problem. But it is also a problem that predates the publication of the Green Deal. We are getting started now on the basis of the Green Deal and we are moving step-by-step in all these areas. Of course, this will lead to quite strong debates with the Member States, but we have no choice, we have to make that choice and to make a tax shift happen.

Article 25 of the Regulation on the Governance of the Energy Union stipulates that all Member States “shall include information on the implementation of the following objectives and measures: … (d) national objectives to phase out energy subsidies, in particular for fossil fuels” in their National Energy and Climate Plans. But nearly all Member States do not comply with this legal obligation. Either they deny to have such subsidies at all or they do not list the the full list of instruments and the corresponding figures and none of them presents a phasing-out plan. How will you deal with this collective breach of law? Would it not be appropriate to launch an Infringement procedure against the Member States which refuse to comply to the regulation? What else will you do to make them comply with the rule?

The Commission’s assessment of the National Energy and Climate Plans submitted by Member States is ongoing. 

It is premature to conclude whether Member States fulfil the requirements in relation to energy subsidies, and in particular for fossil fuels. We will present our analysis in the autumn.

The EC has estimated the fossil fuel subsidies of all 28 Member States together at only €55 billion per year, much less than most other experts. For instance, the Climate Action Network and the ODI found —on the basis of the quite narrow subsidy definition of the WTO —that even for only 11 EU countries, subsidies for fossil fuel exceeded €100 billion. For 24 countries in the European Union, Investigate Europe has found subsidies for fossil fuel use in the range of €200 billion. Why does the EC and its experts exclude so many categories of subsidies from their estimate, like the the Diesel privilege or energy tax reductions for the industry? Do you want to make it appear as a less important, minor issue?

We attach great importance to increasing transparency on the nature and amount of energy subsidies in the EU, particularly as regards fossil fuel subsidies. I can assure you that we do not underestimate or downplay the importance of this topic.

In 2018, the Commission tendered a broad new study based on OECD methodology, looking at fossil fuels, renewables and nuclear energy. This approach allows for comparable data to be used as a reference to improve Member States’ reporting under their NECPs. We are of course constantly reviewing the available data and bringing this issue to the attention of Member States.

And it’s not just fossil fuel subsidies that we need to look at. As we said when we presented the Green Deal, now is the moment for Member States to consider tax reforms which support our climate objectives. The Energy Taxation Directive is 17 years old and no longer fit for today’s challenges. We will propose a revision of the Energy Taxation Directive in June 2021

We think that the key to overcome many of the subsidies for fossil fuel consumption is a harmonisation of the energy taxation in the EU. This is because, for many Member States, it is difficult to cut the tax exemptions (for instance for Diesel fuel or the haulage sector) if they only do it at a national level and not in the single market. But at the same time, most member states reject any attempt towards tax harmonisation because they consider tax issues as part of their national sovereignty. Isn’t this schizophrenic, what do you think?

That’s the European reality, the competences we have are clearly delimitated in the Treaty, and we work with those competences.

It’s clear that it would be better if we had one European tax system for energy. It would remove competition between Member States, but that is not the situation we have, so you know, when you have my job, you work with what you have, not with what you would like to have.

And perhaps in taking the steps in addressing the national plans that will be submitted, in looking at the plans that will come out of the Next Generation EU and how we could support that, we can somehow politically push Member States towards more tax harmonisation. The Commission cannot force them, but we can show them what the bottlenecks are and where they will get into trouble with their own goals if they don’t change them. And this is happening in quite a lot of Member States. Italy was mentioned, I also see it in the Netherlands. It is a reality with which we have to [deal]. We don’t have an ideal system of statehood in Europe and taxation is seen very often as intimately linked to the core of national sovereignty.

A way to overcome this paradox — that the solution should be European, which requires unanimity for taxation — would be that the Council use thd famous “clause passerelle.” I believe the Commission has already written in the Green Deal about wanting to use it.

Already the Juncker Commission made that proposal, so yes of course, we made the proposal to use the passerelle to go towards qualified majority for taxation issues.

Do you think this time there is a chance, because the issue is that you need unanimity to pass towards qualified majority? Do you think Member States and the Council will accept the proposal because of the urgency and the crisis?

I think it will depend on what happens in the next weeks and months, in terms of the Commission Proposal both on Next Generation EU, the recovery plan and the MFF.

If we can indeed find a compromise at the EU level with a substantial increase of means to work our way out of this crisis in a way that is consistent with the Green Deal, and our demand of resilience and digitisation, I am absolutely convinced that the issue of fiscality, the issue of QM voting on these issues will be back on the table, but in that order, not the other way around.

The one big issue that is causing us a difficulty in Europe — and you are Italian, you understand this better than anybody else — is the issue of moral hazard, the lack of trust between Member States in several areas.

I think this is a huge opportunity for Recovery EU and the MFF to show that we have overcome this issue of moral hazard that has plagued us in previous crises such as the financial crisis and the migration crisis.

But it is a huge test, and we will need incredible political brinkmanship to get there, and I think we can. I think France and Germany have shown the way out, and if we can get out of this with something substantial that can set the course for realisation of the Green Deal goals, then I think the issue of fiscal harmonisation will also be on the table.

For the moment, the plan the Commission put on the table is to propose something after June 2021. But we think diverting this enormous amount of money towards future investments will be a priority, so isn’t it a bit late to wait for June 2021? If things go in the direction you just described, why not propose a common taxation on energy at the beginning of next year?

Well first of all because it is technically complicated and we need to be well-prepared, with full rounds of impact assessments because otherwise we undermine our own proposal. It just takes time.

Secondly, the dilemma you put on the table is a much broader dilemma, not only on the fiscal schemes. Given the nature of the crisis we need money now (now!) and in the next couple of months, especially in the later part of this year. But given the procedures, the decisions will probably be taken I hope before the summer, but probably after the summer. Then, the MFF will go into force even later.

There is a general issue of urgency, expediency, and opposed to that, there is the need to be thorough and to get a political compromise. So one of the issues that we will have to tackle very quickly is how we can unleash enough funds to invest immediately to overcome the most immediate urgencies of the crisis.

And there I come to the core of my problem. If we can mobilise those funds, then we have to make sure that this money isn’t thrown at what will be frozen assets in a couple of years.

Politically, this is the biggest threat we face now in Europe. First of all, can we mobilise funds and if we can mobilise them, can we spend them in the right way? That is the biggest challenge. I was really encouraged by the decision by the German government last week, to be very green in their support measures, but you immediately see the reaction in society, trade unions and others. Understandable reaction and I know how politics work. If that is the reaction out of a fear of immediate job loss, then the risk of throwing money at future frozen assets will become bigger.

Yes, you point to a challenge in the fiscal area which is absolutely correct, but I even expand the problem to the more general issue that there is a tension between the need to act immediately on the one hand, and the need to act in the right direction on the other hand. I hope we get this right, it is going to be; we will need a lot of brinkmanship to get this right.

Another source of subsidies is also the Emission Trading System. Even 16 years after it started, more than 40% of its permits are allocated for free. 60 different industry sectors are selected to receive free allocations. Why have so many different sectors been selected and not just a few like steel and cement that are highly energy intensive? Why 60 sectors, and why is the mining of hard coal and the extraction of crude oil exempt from paying for their emissions?

You are asking me to explain something that has 16 years of history?

You know that better than I do as to how we got here. It is full of political compromise and much of this was decided when the sense of urgency was much lower than it is today.

But, now we have to move ahead. First of all, the ETS system came out of this crisis better than many of us had anticipated. There was a serious dip in the price in the beginning but it has recovered in the last month or so. It looks quite promising.

Secondly, since we are talking about border adjustment, the Commission has made clear that there is no compatibility between the border adjustment on the one hand and free allocations on the other, so introducing border adjustment would also mean seriously limiting free allocation. Things are changing quite quickly at the EU level. We will make proposals in that direction, but I see also a shift in thinking at the national level.

Third point is, we need to bring more and more sectors. We need to look very seriously at shipping, aviation, much too generous allocation of free rights across the board. It is not very popular in these industries to say this and they will try to use the crisis to make this even more difficult, but those in industries who have worked with us are actually quite unanimous that ETS has a [promising] future if we organise the rights.

We are going to face quite some challenges in our international relations with the Chinese and others on this. If we have a good functioning ETS system, it will be copied in the rest of the world. And China and other states have an interest in how we are organising this.

One warning from many experts, including the national authorities we have talked with, is that the current system helps the industry to protect their old assets — their old technology — but doesn’t give them enough incentives to invest in new carbon-free production facilities for steel, cement and basic chemicals. The head of the German authority called it a ‘sweet poison, a drug’. They are all dependent on these allowances, but it does not help them to invest in hydrogen steel-making instead of coal-based. Do you see this as a risk, that ETS in giving incentives for the transition instead of fixing the old technologies, will produce more stranded assets?

The risk is there, especially if you are too lenient with free allocations. So we want to reduce the free allocations. On steel, I don’t think there is a future for dirty steel in Europe, we will never be able to compete on dirty steel. But I think there is huge potential of green steel. It will take more years, it will ask huge investments in R&D that we have to be willing to make, but I honestly believe that steel with hydrogen has a huge future and not just in Europe.

It will create a new global market for green steel and we will do everything we can with subsidies, with research, but also with limiting of allocations in ETS to push the steel industry in that direction. We’re having similar discussions with the chemical industry and with other non-fero-metal sectors.. You are absolutely right to point to this weakness in the system, but it is something we want to fix.

The interesting detail is that if you sell more allowances on the market through auctions, you have revenues you can use to subsidise clean technologies.

Yes, absolutely and you could also decide that a small portion of those revenues would flow directly to the EU budget, allowing you to create your own resources. The beauty of the ETS system is that you can identify precisely what the income is and then you can also identify that you can spend it on new technologies, on greening the economy.

Reducing free ETS permits but also introducing a carbon tariff seem to go together. If you do not arrive to the second one, will you still consider reducing the the free permits? Or is it too difficult for the companies?

There is not a simple answer to that, because if we now reduce free allocations without a carbon border adjustment, some industries will retain more free allocations than others, because we have to compensate for the fact that they have unfair competition from other parts of the world. But that doesn’t apply to other industries.

So, both are linked, in the sense that I don’t want to give free allocations if we have a border adjustment mechanism. But turning it around, if you don’t have a border adjustment mechanism, that still doesn’t remove the need to reduce free allocations, but we have to be a bit more specific, to avoid carbon leakage.

You said it will take political bravery for Member States at this moment not to throw money at frozen assets for years to come. What will you do about this?

What we have done is put our plans on the table. We have made sure that the Next Generation EU is guided by what we have written in the Green Deal. We’ve put a road map on the table and I hope Member States are willing to follow and again, I am quite positive about the reaction. When Von der Leyen told me that in the Council the recovery should be based on the Green Deal, it was not challenged by Member States. Of course not everybody is equally happy, but they all accept that direction.

And what will you do when Member States don’t follow your road map?

Well we use all the powers we have to get them on the right track, but as you know, we don’t have an army to send to Member States. The force of our arguments should convince Member States. The potential of supporting them financially if their plans are deemed correct to us is also something that will play a role in creating incentives. That is as far as our power goes.