Study by planning agencies: abolishing fossil subsidies is ‘a brainteaser’

Also read: Is abolishing ‘fossil subsidies’ necessary? Experts disagree

According to the planning agencies, the discussion is too much about amounts – do the fossil subsidies add up to 30 or 46 billion euros? – and too little about the core question: does the abolition of a specific tax benefit support climate policy?

That seems obvious: after all, the combustion of oil, natural gas and coal produces greenhouse gases such as CO₂ free that cause climate change. Abolishing a fossil tax benefit always seems like a good idea. But because of how fossil subsidies have been calculated until now, that is not necessarily the case. The planning agencies therefore opted for their own unique view of fossil subsidies.

Unlike, for example, the outgoing cabinet, they did not calculate the difference between the highest and lowest tax rate on a fossil fuel, and designate the difference as a subsidy. The planning agencies looked at the difference between the tax on a fossil fuel and the climate damage caused by burning it. The planning agencies calculated a price of 130 euros per tonne of CO emitted₂.

14 billion in subsidies

Viewed in this way, the planning agencies arrive at a total of 13.7 billion euros in fossil subsidies on direct consumption of fossil fuels – that is, if they are burned. “We also think these are significant subsidies,” says Vollebergh.

This specifically concerns tax exemptions worth EUR 5.8 billion on kerosene and fuel oil in international shipping and aviation, the low tax on the burning of fossil fuels in industry (EUR 2.4 billion), free allowances for industrial companies to use greenhouse gas CO₂ within the European emissions trading system ETS (2.1 billion euros), and for tax exemptions on the consumption of gas and coal in the production of electricity (2.5 billion euros).

The planning agencies did not calculate indirect consumption of fossil raw materials, such as in the plastic industry that turns an oil product into plastic. This is because there is no direct CO₂emissions come from: the carbon from oil is captured in plastic. Emissions are only released when plastic is burned as waste. The planning agencies see the absence of excise duties on these fossil raw materials as an ‘indirect fossil subsidy’, but they do not specify the size further.

On Budget Day, the government published its own estimate of this subsidy on the use of fossil raw materials by industrial companies such as plastic manufacturers: it was no less than 14 billion euros. The government included a number of other tax benefits and therefore arrived at a much higher amount of 39.7 to 46.4 billion euros in fossil subsidies.

If you look at fossil subsidies through the perspective of planning agencies, there are also benefits that you do not want to abolish

If you look at fossil subsidies through the perspective of the planning agencies, there are also tax benefits that you do not want to abolish, because abolition will hinder the transition from fossil to sustainable energy sources. This applies to the low tax rate for large consumers of electricity. Large companies pay a much lower tax rate on electricity than citizens. In the government’s inventory, that low rate counts as a fossil subsidy, because part of that electricity is still generated with coal or natural gas. But a significantly higher tax rate for large consumers would slow down the electrification of production processes, while this is necessary for the energy transition. That electricity must of course be generated from sustainable sources such as wind turbines.

Not easy

Phasing out fossil subsidies is also not easy. A real brainteaser, the planning agencies call it. For example, fossil subsidies for shipping and aviation are the result of international agreements that the Netherlands must adhere to. In that case, an air travel tax helps. Or convince other countries to levy taxes on these bunker fuels.

The planning agencies acknowledge that abolishing fossil subsidies in the Netherlands could lead to emissions elsewhere in the European Union, as energy experts said on Monday in the economists’ journal ESB argued. Many companies that receive fossil subsidies fall under the European emissions trading system ETS, which forces them to reduce CO emissions₂ to lower. The total number of CO₂rights in the European Union will remain the same if the Netherlands abolishes fossil subsidies. But there is a solution for this: the European Commission regularly removes remaining allowances from the market. “I am a very big fan of the ETS, which strongly encourages companies to reduce their emissions. But without these fossil subsidies, the ETS incentive would already be greater,” says Vollebergh.

The planning agencies did not analyze the consequences of abolishing fossil subsidies. Which companies are affected? Are there companies going bankrupt or moving abroad? Yet the planning agencies do say something about it in their study. Sometimes it may be justified to levy less tax on production that is easily moved to other countries. Especially if those companies then produce the same amount of CO elsewhere₂ going to emit.