COP28: Could the EU be at the forefront of a global breakup with fossil fuel subsidies?

As the COP28 draws near, the European Union prepares to discuss the phaseout of planet-harming subsidies.

According to a recent report by the European Commission, fossil fuel subsidies in the 27-member bloc soared from €56 bn in 2021 to an estimated €123 bn in 2022 in the face of skyrocketing prices, thus disrupting the downward trend observed since 2018.

Following Russia’s fuel export reductions last year, European governments indeed cut excise taxes on energy products and weaken incentives for consumers to save and switch to cleaner energy sources in a bid to alleviate high power bills and production costs.

“Subsidy measures were one of the primary tools to counteract the effects of high energy prices,” the report says, with EU member states creating 230 temporary subsidy instruments in response to the energy crisis for a total estimated value of €195 bn.

As a result, total energy subsidies in the EU increased dramatically to reach around €390 bn in 2022. Financial aids to fossil fuels made up for the largest share, at 31%, due to a wider support to households, as well as the transport and energy sectors.

Renewable energies, on the other hand, accounted for only 22% of total energy subsidies – down from 40% in 2021.

We’ve got to break free

France is a case in point. As part of this year’s state of the energy union report published late October, the European Commission revealed that France’s subsidies to oil, natural gas and coal had reached €27.8 bn in 2022, more than doubling from the prior year – when they were standing at €11.8 bn.

“All countries increased their energy subsidies following the energy crisis. France is no exception,” Tara Laan, senior associate with the International Institute for Sustainable Development’s (IISD) energy programme and one of the authors of a study released this week assessing the amount of public money going to fossil fuels, told Net Zero Investor.

In September, French President Emmanuel Macron said that the nation’s new climate plan would allow it by 2030 to reduce from 60% to 40% its reliance on fossil fuels, “which we don’t produce anymore but depend on” and “costs us €120 bn per year.”

Among the measures that France put in place for both of them, Bruegel’s National fiscal policy responses to the energy crisis cited reduced energy taxes, retail and wholesale price regulation, mandate to state-owned companies and windfall profit taxes.

Between Sept. 2021 and Jan. 2023, France’s earmarked and allocated funding dedicated to shield households and firms from the energy crisis represented 3.7% of its GDP, the European think tank finds, citing data as of end-June.

The French government was not available to answer Net Zero Investor’s questions.

For Laan, the obstacles to scrapping fossil fuel subsidies in France are primarily political.

“People expect the government to step in to reduce cost-of-living pressures,” she said. “In the case of fossil fuels, the government has a role in communicating to the public that fossil fuels have huge negative impacts on society and therefore reducing prices for these fuels or encouraging production is simply not an option in the context of the climate crisis.”

Instead, the energy expert believes that it needs to provide “a clear offer” of what French citizens will obtain in exchange for fossil fuel subsidy reform and guarantee that this offer will provide them with equitable benefits.

Climate promises were made

Consuming and producing fossil fuels imposes substantial environmental costs, like air and water pollution, and is by far the single largest contributor to climate change, according to the United Nations.

The European Commission says that 98% of fossil fuel subsidies granted in the EU last year are considered environmentally harmful, which led EU institutions to multiply calls to action ahead of the COP28 climate summit, set to start at the end of the month in Dubai.

Following the release of the Commission report, EU Commissioner Wopke Hoekstra said in a conference call that those aids had been crucial to counter the energy crisis but were now “anachronistic” unless they address energy poverty or the just transition.

The Council called in October for a phaseout of fossil fuel subsidies “as soon as possible,” which an EU official described in an email to Net Zero Investor as “a compromise” to accommodate the nations that are not ready to accept a specific deadline.

A month later, the Parliament’s environment committee approved a draft resolution asking, among others, that countries at both EU and national levels end all direct and indirect fossil fuel subsidies “as soon as possible and by 2025 the latest.”

According to the bloc’s executive arm, over 50% – €64 bn – of fossil fuel subsidies in the EU don’t have an end-date or are set to end after 2030.

But it will take more than words and draft resolutions to live up to the climate promises that were made eight years ago.

“Under the Paris Climate Agreement, parties pledged to make ‘finance flows consistent with a pathway towards low GHG emissions and climate-resilient development’,” Laan stressed. “At COP26 in 2021, they promised to accelerate ‘efforts towards the phasedown of unabated coal power and phaseout of inefficient fossil fuel subsidies.’ These commitments have not been achieved.”

“In fact, the global data for 2022 shows that the gap between commitments and implementation is growing,” she added.

Will COP28 be the one?

For Peter Sandahl, head of climate and environment at Finnish banking group Nordea, there is “much to wish for” during COP28.

The IISD reveals in its new study that on a global scale, governments have provided over $1.7 tn in public money to support fossil fuels last year, a record high that includes $1.3 tn in subsidies, $350 bn in investments by state-owned enterprises in G20 countries, and $22 bn in lending from public financial institutions by G7 countries and multilateral development banks.

“The next few years will be critical in the global shift to net zero,” a spokesperson for German insurance group Allianz told Net Zero Investor. “But with the record-high subsidies for fossil fuels in 2022, the world is not only moving dramatically away from the internationally agreed climate target but is also accelerating social inequality.”

Despite their intent, subsidies are often missing to provide relief to poorer households, Allianz noted: “the top 20% of households receive over six times more in total subsidies than the bottom 20%, rendering universal fuel subsidies ineffective and unjust.” As such, a focused financial support to the vulnerable is vital to “a long-term and balanced strategy to a just net-zero economy,” the company explained.

Late October, 131 multinationals urged the political leaders attending the COP28 to agree upon a timeline to move away from fossil fuels as the momentum behind the clean energy transition is now sufficient to push their demand to a high point before 2030, the International Energy Agency (IEA) estimates.

“Given the presidency’s focus, I hope to see new commitments on further scaling up renewable energy deployment and increasing the rate of energy efficiency improvements,” Sandahl wrote to Net Zero Investor, as the conference will be presided by the managing director and head of the Abu Dhabi National Oil Company (ADNOC), Sultan Ahmed Al Jaber.

“News around the loss and damage fund and financing targets, especially the post-2025 target, would also be important,” he added.

However, if public financial support to renewable energy generation, grid integration of clean energy and battery storage appears to be growing, IISD’s Laan flagged that such measures were not enough to limit the planet’s warming to 1.5 degrees Celsius.

“Governments need to start by redirecting the financial flows directly under their control,” she noted.

But Sandahl is not exactly hopeful. “I would, of course, welcome more stringent announcements regarding the phasing out of fossil fuels and related subsidies. I don’t have very high hopes for this to materialise, but would be happy to be proven wrong.”