Phasing out environmentally damaging subsidies
Environmentally harmful subsidies are mainly grants or tax reductions/exemptions that enable certain consumers, users or producers to supplement their incomes or reduce their costs, but have an overall negative effect on the wider environment. The EU is committed to phasing them out by 2020.
Subsidies that may have a negative impact on the environment – known as environmentally harmful subsidies (EHS) – are common in areas such as fossil fuels, transport and water, and they are estimated to be worth USD 1 trillion worldwide. But while they appear to benefit industry or consumers, they actually lead to wasteful use of natural resources, harm our biodiversity, maintain inefficient practices and discourage innovation.
The Commission is pushing for a reform of these subsidies by Member States in a process known as the European Semester. The EU is far from being alone in this focus on reforming subsidies: commitments have been adopted at the global level, in the context of the Convention on Biological Diversity (CBD) and the G20, for example, and existing pledges to reform such subsidies were reiterated at the Rio+20 Conference.
But progress has been slow at EU and national levels. There have been some EU successes and recent proposals for reforming the Common Agricultural Policy (CAP), the Common Fisheries Fund and the Cohesion Policy Funds make financing conditional on respecting environmental objectives. But nationally there is still a need to develop effective action plans, with clear targets and timelines, and a transparent system of reporting. This applies also to environmentally harmful subsidies through tax exemptions in Member States.
In a world struggling with the financial and economic crisis, reforming these subsidies would be a smart move. According to OECD and Commission figures, removing fossil fuel subsidies in the 27 Member State budgets would bring in over EUR 25 billion. It would also lower greenhouse gas emissions and lessen pollution associated with fossil fuel use, leading to cleaner air and water.
The Commission is determined to draw attention to the damage caused by these subsidies. It is marshalling well-founded economic and scientific arguments to justify why their abolition will promote resource efficiency and green growth. It is now armed with several studies that will facilitate proposals for reform and increase its acceptance, including more than 30 case studies and examples of reform that represent best practice. Econometric modelling work on the impact of environmental tax reform, such as the shift of taxation from labour to pollution and resource use, will be available in March 2013.
The extent to which the message is striking home will become clear in the next European Semester exercise. This requires governments to explain to the Commission what measures they have taken to respond to specific fiscal reform recommendations to shift taxation from labour and to start phasing out EHS from 2012.