healthier, happier and richer

The EU aspires to be a world leader in reducing carbon emissions. It seeks to develop renewable sources of energy and new ways of making coal and gas cleaner. Success in these areas would enhance the EU’s energy security and foster innovative sectors, as well as helping the EU to achieve its climate change targets. But it will require significant investment. The need to bring ballooning budget deficits under control means that financial support must be carefully targeted. The EU and its member states should transfer subsidies from coal to renewables, energy efficiency and clean coal.

The EU has committed to reducing greenhouse gas emissions by 20 per cent (from 1990 levels) by 2020, and to raising the share of energy from renewables to 20 per cent by the same year. It has also adopted a non-binding target to improve energy efficiency by 20 per cent by 2020; and it aims to build 15 large plants with carbon capture and storage (CCS, a technology to reduce the CO₂ emissions of coal and gas-fired power stations and other industrial facilities) by 2015.

Targets and timetables are useful for focusing politicians’ minds and allowing businesses to plan ahead. But targets alone are not enough. To meet them, the EU member-states will have to invest substantial sums at a time when public finances are seriously strained. Renewables have enormous potential for expansion. But they are not cheap (at least not yet). CCS is also substantially more expensive than traditional ways of burning fossil fuels. The EU’s energy efficiency target will require investment in existing building stock and industrial machinery.

The Commission has done well in securing some money to support renewables and CCS from the ‘European economic recovery plan’ (the EU’s 2009 economic stimulus package) and from auctioning permits under the EU’s emissions trading scheme. However, the funds are limited. The recovery plan’s grants are not large enough for the construction of the six CCS plants that the EU selected for support, and member-states have been slow to come up with the required co-financing. In total the grants amount to just €1 billion. By comparison, EU countries (particularly Germany and Spain) paid out €3 billion in national coal subsidies in 2008 alone. All OECD countries together give $400 billion every year in subsidies to fossil fuels, compared with $45 billion to nuclear and $27 billion to renewables, according to the International Energy Agency.

Some subsidies for coal are justifiable. First, the coal industry still provides 280,000 jobs across the EU. Most of these would disappear almost over night in the face of cheaper coal imports if it was not for government help. Second, the EU will not be able to rely 100 per cent on renewables for several decades, so other sources of energy are still needed – but these should be low-carbon ones. CCS can cut the carbon emissions per unit of electricity generated from a coal plant by 90%. Therefore, the only way to make coal subsidies compatible with climate policies is to shift them to CCS.

There is growing international agreement on the undesirability of fossil fuel subsidies. In the autumn of 2009, the leaders of the G20 countries promised to phase them out “over the medium term”. G20 members France, Germany, Italy and the UK signed up to this pledge, as did the EU itself. Yet Germany, as well as the EU’s other big coal producers, namely Poland, Spain, Romania, Slovakia and the Czech Republic, have been lobbying the European Commission to be allowed to keep their national subsidies in place.

But the Commission is taking a tougher line. In December 2010, it will have to review existing state aid rules for one type of coal, hard coal, which accounts for 18% of electricity produced in the EU. The rules were agreed in 2002, as a ‘transitional arrangement’ to enable member-states to phase in the inevitable closure of mines (roughly 60% of the hard coal used in the EU is already imported). Various EU governments want to keep the subsidies in place for at least another decade. They argue that their withdrawal would only lead to higher imports of cheaper coal from Russia, Colombia, South Africa and the US. The result would be EU job losses of up to 100,000, mostly in Germany, Spain and Romania — and no change in carbon emissions globally.

On 20 July 2010, the Commission proposed a further transitional arrangement for four years – not ideal but much preferable to the 12-year extension it initially talked about. When the EU’s Council of Minister decides on the proposal later this year, the Commission should make sure that the four-year deadline is final.

The Commission should use not only its competence on state aid but also its authority in competition policy to fight dirty coal subsidies. Spain is one country on which Competition Commissioner Joaquín Almunia has to make a pressing decision. Spain relies on coal for a quarter of its power production so CCS would make a huge difference for its CO2 emissions. The Spanish government hopes to extend a small pilot CCS plant at Compostilla (which it is building together with the utility Endesa) to become one of the EU’s 15 demonstration projects. The EU has earmarked €180 million from its recovery plan for the Compostilla plant. The rest of the money will have to come from the Spanish government budget, which is under severe strain. However, rather than trying to find the money for the CCS plant, the Madrid government adopted a decree in February to increase financial support to ten conventional power plants that burn local coal – with a price tag of €800 million over three years, according to the Spanish energy regulator.

Almunia has yet to clear this decree. He should refuse. The Commission must use all available policy instruments to support the EU’s climate change targets. It should use competition policy to target national fossil fuel subsidies and tighten state aid rules to require that subsidies go to cleaner, not dirty, coal.

(This article was first published in the Centre for European Reform’s August-September bulletin.)