Update: Energy Taxation and Subsidies in Europe

Daniel Radov, Clemens Koenig, et al.

The Situation

There are now a number of ongoing analyses undertaken by major international institutions to estimate the level of “subsidies” and “support” received by fossil-based energy sources around the world (examples include OECD, IMF, and IEA). The motivation for many of these studies is to help governments compare policies towards different energy sources on a like-for-like basis, to enable more efficient policy making. Underpinning these studies is the recognition that some sources of energy receive support from government policies that may provide them with a competitive advantage relative to other sources of energy. Often this is presented in the context of arguments that renewable sources of energy, such as wind and solar power, require additional support from governments, because they do not benefit from the types of support that different forms of fossil fuels receive.

In June 2014, NERA published a report commissioned by the International Association of Oil and Gas Producers (IOGP) comparing the taxation and subsidy regimes applying to oil, gas, coal, wind, and solar power in all 28 EU Member States and Norway during the period 2007-2011. The study was meant to provide a clear and transparent approach to understanding different estimates of subsidy and government support and to put them in a broader context of government revenues from different energy sources.

NERA's Role

The NERA project team, led by Director Daniel Radov, has completed a new study on behalf of IOGP comparing the government support to, and revenue from, five different energy sources, including oil, gas, coal, solar PV, and wind power, across the EU and Norway. The study updates NERA’s earlier 2014 report on the same topic. 

The Result

NERA finds that oil and gas are both substantial net contributors to government revenues, providing significantly more than the other sources, in both absolute and relative terms. Net support to the two renewable technologies remains relatively high, and although per-energy unit support has fallen for solar PV in particular, new investments still require support, on average.

The updated analysis finds that the net contribution or cost of each energy source amounts to €337bn for oil, €76bn for gas, €34bn for coal, €-2bn for wind, and €-22bn for solar power. Government support to oil & gas totaled €3.3bn.

A major advantage of the analysis is that it allows cross-sector, cross-energy, and cross-country comparisons, which is not possible to do in a meaningful way under many of the other approaches used in the literature. This approach also enables the calculation of total support—and revenues—across sectors, energy, and countries.

The report is intended to serve as an input to policy makers considering how to balance a range of public policy needs (including energy security, costs to consumers, environmental protection, innovation and industrial policy, and public finances) as economies make the transition to cleaner energy. It includes commentary on the relationship of externality costs (or benefits) to government revenues and subsidies. In particular, without an understanding of wider economic interactions, making simple comparisons of externality values to fiscal values runs the risk of drawing incorrect conclusions about the overall social costs and benefits of different energy sources.