Europe’s love affair with fossil fuels

Alexia Barakou

One of the few positive outcomes of the Covid-19 lock-down has been the clear skies, rise in air quality and drop in carbon levels. With the lock-downs easing in much of Europe and governments being keen to get their economies back on track, there is at least an acknowledgement that a return to the old ‘normal’ will only lead us further along the path to the next looming catastrophe — that of climate change.

2020 was also supposed to be the year the EU would launch its ambitious plan to tackle the climate crisis. But the European Green Deal — the European Commission’s policy initiatives aimed at making the EU climate neutral by 2050 — is already facing criticism of not going far enough and lacking real substance. Worse still, European governments still provide subsidies to fossil fuel industries under many guises. This includes tax breaks, the capacity market, the Emissions Trading System. Investigate Europe set out to discover the extent of these subsidies and to understand how the EU — along with the UK, Switzerland and Norway — is sabotaging its own targets.

Through our research we found out that the 30 countries of the European Economic Zone and the United Kingdom provide subsidies for fossil fuels such as coal, lignite, gas and oil to the tune of at least €137bn a year. In comparison, the total annual EU budget is €155bn.

In absolute figures, Germany tops the list at €37bn per year, followed by the UK at €19bn, Italy at €18bn and France at €17.5bn. See our interactive map below for more details, based on our findings.

Unachievable target

The goal is for the EU to be climate neutral by 2050. By 2030 — just ten years’ away — the EU governments have committed to reducing the emission of greenhouse gases by 40% of their 1990 level. To achieve the promised decarbonisation of the economy, the European Commission demands that this reduction be increased to at least 55%. However, neither of these targets are feasible while these subsidies continue to exist. According to European Commissioner Frans Timmermans, who is responsible for the Green Deal, these subsidies “will be phased out.”

A graphic of the Green Deal, with two hands covered in plants making a thumbs up signAlexia Barakou
The Green Deal aims to see a carbon neutral Europe by 2050

But actual commitment from the governments does not match this rhetoric. By the end of 2019, all Member States were expected to have submitted their National Energy and Climate Plan (NECP) to the EU Commission. This was to include an inventory of all existing fossil fuel subsidies and a plan as to how they were to be phased out. Of those that have submitted a plan, 16 countries have provided an incomplete list of fossil fuel subsidies. And none of the 26 plans can clearly demonstrate how these subsides will be phased out.

The reason these plans are so incomplete is because of a loophole of the Commission’s own creating. Instead of stating explicitly what constitutes a fossil fuel subsidy, the regulation states: “When reporting, Member States may choose to base themselves on existing definitions for fossil fuel subsidies used internationally.” But there are so many different definitions that each government can choose, with most opting for the one that best fit their political aims. The UK and the Netherlands (numbers two and seven on our list, respectively) deny even providing any fossil fuel subsidies and they are able to do so, thanks to the definition they use.

That fossil fuels are deeply embedded in European economies should come as no surprise as the majority of EU Member States are producers of oil and gas, while in Poland coal is still king.

European contradictions

“Fifty-two days without coal-based electricity,” boasted Portugal in early May. “Sixty-seven days,” replied the UK in early June, not to be outdone. Poland cast down its eyes and shuffled its feet.

The Bełchatów Lignite Mine in PolandPhil MacDonald / CC BY-SA
Bełchatów Lignite Mine and Power Plant in Poland

The Bełchatów Lignite Mine and Power Plant in central Poland burns opencast coal day and night. It is the largest polluter in Europe, and as the world’s largest lignite power plant, it emits as much as 37 million tonnes of carbon dioxide every year. The hole in the ground created by the opencast can be seen from the moon. Over the last two years, the emissions of heavy metals — arsenic, zinc, lead, nickel, copper and chromium — have increased by more than 50%. Mercury has also seen a year-on-year increase.

Ironically, the state power plant, which poisons people while destroying the climate, boasts of the low cost of the energy it produces. “Coal is our black gold,” Prime Minister Mateusz Morawiecki tells miners. But low costs are the result of open (and hidden) government subsidies. In 2019 alone, the power plant received as much as half a billion zlotys in subsidies; that is as much as 10% of its total revenues. In 2013-2019, it received over 2.5 bn PLN in the form of subsidies, and could also count on preferential loans and European funds.

The Polish state maintains a drip of subsidies to keep mines and coal-based power generation alive. A dozen or so subsidy mechanisms consume over 7 billion zlotys a year from the state budget and citizens’ pockets. They are used mainly by coal-fired power plants. These are the same plants that Poland is officially supposed to get rid of as soon as possible in order to protect the climate.

A subsidy by any other name

The UK does not give subsidies to fossil fuels,” was the response from the British government to an online petition calling for fossil fuel subsidies to be converted to those for renewable energy. “Fossil fuels are not subsidised in the Netherlands, not even through fiscal measures,” Henk Kamp, then Minister of Economic Affairs told the House of Representatives five years ago. These claims, by the UK and the Netherlands, are where the tricky matter of definitions come in.

The UK (second in IE’s data set) does not, for example, consider a reduction on the rate of VAT from 20% to 5% on domestic gas and electricity as a subsidy. Nor does it take into account the Capacity Market — the subject of a recent legal challenge over state aid rules. Or financing by UK Export Finance (UKEF), a public finance institutio, which supported fossil fuel-based power generation projects with a yearly average of €16.7m between 2014 and 2016.

The Netherlands (seventh in IE’s data set) asks you to overlook tax exemptions such as that for the use of coal in electricity production (abolished in 2012 but reintroduced in 2016) and the co-firing of biomass in coal-fired power plants subsidised by €450m per year. And, as with the UK, the funding of projects abroad through export credit insurance, which would need to be ended multilaterally to “level the playing field”, as State Secretary Hans Vijlbrief explained to the House.

What about the consumer?

For decades, diesel was used almost exclusively for commercial vehicles — namely trucks and tractors. For the sake of economic development, the price of diesel in all EU countries (with the exception of Belgium) is lower than the price for gasoline. This was explicitly specified by the EU in a 2003 energy tax directive. “For diesel fuels, which are used especially by road hauliers, special tax treatment (…) has to be provided”, it reads.

This led the automotive industry to invest heavily in cars with diesel engines, with the result that millions of Europeans now drive cars that poison the city air with their high nitrogen oxide emissions while escalating climate change. The cheapness of the fuel also encouraged the logistics industry to switch from climate-friendly railways to trucks on motorways. Even though the damage is obvious, Europe’s leaders refuse reform.

Manifestation du mouvement des gilets jaunes, au carrefour de l'Espérance, à Belfort, le 17 novembre 2018.Thomas Bresson/CC
Gilet Jaunes protestors in France

In another example of the word meaning what you want it to, in Germany, the federal government denies that diesel is a subsidy at all, with the result that it waives revenue of €11.5bn a year in favour of diesel drivers, almost twice as much as was left for projects in its 2019 climate fund. This is repeated across Europe with 12 countries for which the data was available waiving €23bn per year.

And as to why this non-subsidy-subsidy still exists: “We do not want to punish consumers with a higher price at the petrol station,” said one of the German officials involved, who did not want to be named.

And punishing consumers is exactly how any increases in fuel prices are seen. In 2018, when the French government tried to raise the tax on petrol by 2.9 cents per litre and diesel by 6.5 cents, it set-off a nationwide protest movement. The Gilet Jaunes nearly brought down the government. “People complaining about rising fuel prices are the same ones who complain about pollution and how their children suffer,” said President Emmanuel Macron. In the end, he abandoned the reform.

Burning cash as well as oil

The sun rises on another day in Rhodes, the Greek island popular with holiday-makers, but through the calm of the early morning tears the sound of giant engines. The Ice Hawk — a tanker carrying fuel for the local power plant — has arrived to unload its cargo. When it docks, divers connect it to underwater pipelines before giant pumps push 6,000 tonnes of dirty mazout and diesel fuel into tanks on land. While the locals in the nearby village of Soroni are looking forward to welcoming back the tourists, this scene — one that plays out over many of the Greek isles — is a reminder that the return of the tourists will place huge demands on all the islands’ electricity supply.

When tourists return to the Rhodes, the demand on the electricity supply will increase significantly

Producing electricity in this way from oil is not only a dirty business, but also an expensive one. And yet, connecting the islands to the onshore grid would pay for the initial investment through savings in just a few years. Take Crete, for example: connecting the island to the onshore grid would pay for itself in only two and a half years, while at the same time leading to a 60% reduction of emissions of carbon dioxide (almost half the energy produced for the grid comes from clean sources).

This has been common knowledge for over 20 years. Yet, the oil-fired power plants keep burning, supported by government subsidies. They also bring profits to the owners of the tankers carrying the oil. “It’s crazy that the whole world has been talking about climate protection for so long, and we are still wasting billions of Euros to operate a few dozen, ridiculously expensive oil power plants,” says Takis Grigoriou, Greenpeace Climate and Energy Campaigner. “[That’s] just because the state has, for years, been weak and reluctant to solve an environmentally- and financially-damaging issue.”

The European love affair with fossil fuels

What has been described here are just a few examples that the IE team found over the course of the investigation. To describe them all would be to write a book. So why, despite all the talk of a climate emergency, are fossil fuels being subsidised to such a worrying extent? It would be too simplistic to put it all down to lobbying, although the role of the fossil fuel lobby should not be underestimated.

Jean-Christophe Verhaegen/EU
Extraordinary Plenary session – The European Green Deal- Resumption of session and order of business- Commission statement – The European Green Deal

Fossil fuels have powered our economy since they helped propel the industrial revolution and are so embedded in our way of life that their use has almost become an addiction that we can’t let go of. And while governments try various ways to wean society off this addiction, they keep finding a way of creeping back.

This is in large part driven by the fear that businesses will lose their edge by switching to renewables. The fear that by giving up subsidies, they will fall behind competitors who are more committed to immediate profits than slowing down climate change.

The way that public money finds its way into fossil fuels is blurred and confused by a whole bundle of acronyms, exemptions, markets and trading systems. That this is complicated and difficult to understand is part of the problem, making the truth hard to find and even harder to challenge. We have examined some of them in more detail:

Energy Tax Directive (ETD)

The 17-year-old Energy Taxation Directive (ETD) is a major obstacle preventing the EU from phasing out fossil fuel subsidies. In September 2019, the European Commission published its evaluation of the ETD, with the conclusion that “the EU Energy Taxation Directive is no longer in line with the EU climate objectives”.

The range of tax breaks is extensive, including for aviation, maritime transport and the use of coal, gas and oil to produce electricity. It also allows member states to apply tax exemptions and reductions for the use of fossil fuels in other economic activities such intensive industry, haulage, and diesel for agriculture

The European Green Deal states “the need to better align our taxation systems with EU climate objectives”. The evaluation calls to question the wide range of exemptions and reductions that act as incentives for the use of fossil fuels.

Acknowledging this discrepancy is one thing. Changing it is another. Germany, Sweden and Portugal are very clear about the need to change the ETD, but there is no consensus in the Council. Poland and the Czech Republic are against the revision, arguing their ‘sovereignty’ is threatened by a common energy taxation. And there is more, not-so-public resistance in Council, even without the biggest objector to tax harmonisation: the UK.

The extent of the sea change required to affect a change such as this was neatly summed-up by the Portuguese philosopher Viriato Soromenho-Marques, former member of the High Level Group on Energy and Climate Change, an advisory body to the President of the European Commission Durão Barrosom. “We live within a fable when we think that promises of the European Green Deal can ever be implemented without changes which I can only classify as revolutionary,” he says to IE.

EU Emissions Trading System (EU ETS)

Even well-intentioned measures can have unforeseen consequences. The EU Emissions Trading System (EU ETS) has been described by the European commission as “a cornerstone of the EU’s policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively”. It was set-up to limit emissions from power stations and industrial plants. It works on a very simple principle known by economists as ‘cap and trade’ — a process whereby States set a total annual quantity for emission allowance that is then sold by auction to companies that will produce emissions.

Each year, the total is reduced, giving companies the option of investing in technology that allows them to lower emissions (and sell surplus licenses at a profit) or buy additional allowances should they need to. Unfortunately, it is a system that is very vulnerable to lobby influence and meddling by national governments.

Rather than be sold, many of the licenses have been given away for free. The united industrial associations of all EU countries — primarily the steel, chemical and cement manufacturers —complained about the risk to their competitiveness if they had to pay for emissions. “This would only lead to production disappearing and taking place elsewhere,” explains Jörg Rothermel, the German chief lobbyist for the industries concerned. This is a risk Europe’s leaders do not want to take, given that they are concerned about the relocation of the biggest emitters outside the EU. This would not only take business to another country, but also cause greenhouse gas emissions to increase elsewhere, a phenomenon known in EU jargon as ‘carbon leakage’. Losing the EU business without any benefit to the environment.

Not even coal mines or oil and gas extraction stations — emitters of particularly large amounts of greenhouse gases – have to buy their licenses. In fact, 43% of all certificates are freely allocated: a gift worth billions. Last year, the value of these certificates, measured against the average market value, was €17.8bn.

Capacity market

Capacity markets are sold to politicians and the public as a way of ensuring the lights stay on. As power plants come to the end of their lifespan, plans must be made to replace them to ensure security of supply. This is what the capacity market was set up to do. They do this by committing to generation for delivery years into the future, and thus ensuring grid reliability.

The UK has the most mature capacity market, established in 2014, but other countries (Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Spain and Sweden) either have, or plant to implement, one. Portugal was also early to implement a capacity market but has since dismantled it. The country’s electric sector regulator (ERSE) and the grid manager (REN) stated very clearly that there is no reason to subsidise the ‘availability’ of power, since there was an “excess of energy produced in the Iberian Peninsula”.

Availability of power is not an issue either for much of the rest of Europe, since by the Commission’s own admission, “the EU as a whole is currently in a situation of over-capacity”. So the problem that the capacity market has been set up to solve isn’t currently a problem.

Moreover, capacity markets are seen by many NGOs and climate change activists not so much as a way of keeping the lights on, but rather as a way of keeping the fossil fuel fires burning, tying in governments to contracts of many years, and squeezing every last drop of profit for the fossil fuel industry through the conversion of coal power stations to gas (see UK and Italy) rather than renewables. By its nature, they say, the capacity market is inflexible, favours fossil fuels and excludes innovative technology and renewables.

The power of persuasion

“Fossil fuel sectors are entrenched in the national governments and in the European Union institutions through strong lobbies,” says Viriato Soromenho-Marques.

Pascal Canfin, the French MEP President of the European Parliament’s Environment Committee is even more explicit. “Behind each tax break and subsidy for fossil fuels you have a lobby,” he explains. “On Monday it is the farmers, on Tuesday the haulage companies, on Wednesday it’s another one, and they have the capacity to immobilise the country. So, when we say we subsidise the fossil industry, actually we have tax breaks to reduce the cost of energy for those categories that have been able to negotiate that with our authorities.”

The power of the lobby is clear to see in the feedback requested from the corporate sector, NGOs, energy stakeholders and the public by the commission on proposals to reform the outdated Energy Tax Directive (ETD). Of the 180 responses, the majority argue for maintaining energy tax exemptions. Some even threaten the EU with court cases, while others (such as the aviation association) ask for a pause in any decision regarding the revision of the ETD to a medium-term future post-Covid.

Arguments about competitiveness, level-playing fields and profit can’t even be resolved between EU countries, and that’s before considering trade outside the EU. So, while everyone pays lip service to the need to switch to renewables, the market pressures to maximise profit and maintain competitiveness are too strong to resist. The lobbyists are hovering over every proposed change to fight their corner.

2020 was supposed to be the year the EU would launch its ambitious plans to tackle the climate crisis. “Today’s the start of a journey. This is Europe’s man on the moon moment.” said European Commission President Ursula von der Leyen back in 2019, describing the European Green Deal.

But with the fossil fuel industry being supported by all European governments, and in such creative ways, it’s difficult to see how Europe can come even come close to meeting the types of reduction in emissions needed to deliver these plans. It will take a giant leap of co-operation and commitment to make these plans more than just a ‘fable’. Does Europe have the resolve?