Will Europe’s key climate tool become a fossil fuel subsidy scheme?

NGOs are calling for governments to live up to their promises to end fossil fuel subsidies, picture from a meeting in Rome. Photo: Legambiente

This week, the UN climate talks continue in Bonn on how to implement the landmark Paris climate change Agreement. At the same time in Brussels, the EU’s Emissions Trading System (EU ETS) revision is drawing to an end. The biggest carbon market in the world, the EU ETS should lead by example, promoting a just transition towards a low-carbon future. Instead, it risks becoming a coal investment tool that locks in unsustainable energy infrastructure and prevents us from reaching the Paris goals.

On Wednesday, representatives of the European Parliament, the EU Member States and the EU Commission will meet for the sixth (and last?) time with the aim to strike a deal on the reform of the EU’s carbon market for the 2021-2030 period.

The last remaining open issue is by how much and under what conditions the lower income countries -often reliant on coal- can use the EU ETS to support their energy providers.   

Currently, under the Article10c, countries like Poland can issue free pollution permits to their energy providers, on the condition that they invest the equivalent amount of money in diversifying and modernising their energy production. However, 90% of these investments have gone or are expected to go to support existing fossil fuel infrastructure. This derogation of the rules was supposed to be temporary until 2019, but has been extended by another 10 years in the current proposal.

Furthermore, a Modernisation Fund will be set up to channel funds to lower income countries for a similar purpose, to help them transition towards more sustainable energy systems.

EU lawmakers want to prevent ETS coal subsidies

The European Parliament has introduced a pollution limit on the plants that can benefit from these measures. The so called emissions performance standard would effectively exclude any investments in coal.

The Parliament’s call was echoed by the governments of Denmark, France, Germany, Luxembourg, Netherlands, Sweden and United Kingdom who recently wrote to the Estonian presidency, urging the other EU Member States to ensure that the Modernisation Fund would not be used to support any solid fossil fuel based energy generation – such as coal.

A recent report by CAN-Europe and Overseas Development Institute found that in spite of pledges to phase out fossil fuel subsidies by 2020, 11 European governments and the EU spent a whopping 112 billion euros of taxpayer money per year in oil, gas and coal projects in Europe between 2014-2016.

Depending on the final outcome of the current talks, the over generous free allocation and the provisions allowing lower income member states to support coal could make the EU ETS a massive fossil fuel subsidy scheme with an estimated 160 billion euros (assuming an average price of 20 euros per tonne) to be potentially channeled towards the biggest polluters between 2021-2030.

The subsidies come in different forms, but they all share the sinister side effects: They drive dangerous climate change, fuel the air pollution crisis and contamination of our land. They make the urgently needed energy transition more expensive and distort markets, leading to an unfair competition between fossil fuels and renewable, sustainable energy sources.

As the rules to put the Paris Agreement into action are being fleshed out, it is time for European governments to walk the talk and stop subsidising a climate and environment disaster. A place to start: fix the rules of the EU ETS so that it doesn’t become another fossil fuel subsidy but instead drives the low-carbon transition of Europe’s energy and industry sectors.

Kaisa Amaral