Energy subsidies in the European Union : a brief overview.
Date: 2005-07-13
Institutions: European Environment Agency
Subjects: EU Member State, State aid, economic instrument for the environment, economic support, energy policy, price of energy, renewable energy

EEA Technical report

1/2004

Energy subsidies in the 
European Union: 
A brief overview

Cover design:  EEA
Layout: EEA

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Contents

3

Contents

Acknowledgements .......................................................................................4

1. Summary and conclusions ..........................................................................5

2. Introduction ...............................................................................................7

3. Energy subsidies — an overview ................................................................9

4. Estimating energy subsidies in the EU 15 ................................................13

5. Historical perspective ..............................................................................16

6. Addressing market failures ......................................................................17

7. References ...............................................................................................19

4

Energy subsidies in the European Union: A brief overview

Acknowledgements

This report was prepared for the European 
Environment Agency by Future Energy 
Solutions (AEA Technology). The 
lead author was Matthew Savage, with 
contributions from Paul Baruya and Jack 
Cunningham.

The EEA project manager was Aphrodite 
Mourelatou with support from the following 
EEA staff: Peter Bosch, Ricardo Fernandez, 
Jeff Huntington, Peder Jensen, André Jol, 
Lars Mortensen, Hans Vos, Jean-Louis Weber. 

EEA and AEA Technology gratefully 
acknowledge the valuable contributions of 

the following to the publication: Shimon 
Awerbuch (Tyndall Centre, SPRU, University 
of Sussex), Laurent Dittrick (European 
Commission), Thorbjørn Fangel (Danish 
Environmental Protection Agency), Jørgen 
Henningsen (European Commission), 
Paul Hodson (European Commission), 
Christian Kjær (EWEA), André de Moor 
(Ministry of Education, Culture and Science, 
Netherlands), Frans Oosterhuis (Vrije 
Universiteit Amsterdam), Ron Steenblik 
(OECD), Kai Schlegelmilch (German 
Ministry of Environment).

1.  Summary and conclusions

Summary and conclusions

5

There is no agreed deﬁnition of energy 
subsidies among European Union (EU) 
Member States. The term may include 
cash transfers paid directly to producers, 
consumers and related bodies, as well as less 
transparent support mechanisms, such as tax 
exemptions and rebates, price controls, trade 
restrictions, planning consent and limits on 
market access. It may also cover government 
failure to correct market imperfections, 
such as external costs arising from energy 
production or consumption. This results 
in a wide range of economic estimates and 
confusing policy arguments. 

Beyond the annual report of direct state aid 
for the coal industry, there is no harmonised 
reporting mechanism for energy subsidies. 
The European Parliament (Oosterhuis, 2001) 
and the European Commission (2003a) have 
attempted to provide a full audit of energy 
support in the EU 151. Both reports are 
snapshots based upon best available data, 
rather than structured ongoing reviews, and 
have not been updated since. 

This report has synthesised data from a range 
of sources to estimate the size of support to 
the energy sector within the EU 15. Total 
subsidies (excluding external costs) were 
estimated to be in the order of EUR 29 
billion in 2001. 

Despite signiﬁcant emissions of carbon 
dioxide and residual air pollutants 
emanating from the burning of fossil fuels, 
the amount of fossil fuel subsidies remains 
high, particularly for coal2. Support for 
renewable energy, which is on balance 
considered environmentally beneﬁcial3, is 
increasing steadily through the introduction 

of regulatory support mechanisms. With 
the exception of large hydro-electric power, 
renewable energy represents a much less 
mature industry with arguably greater need 
for technological and market support to 
enable full commercial development. It can 
be expected that subsidies for renewable 
industry will fall as costs decline and the 
technologies mature.

There is some evidence to suggest that, in 
historical terms, renewable energy subsidies 
in the EU 15 are relatively low in comparison 
with other forms of energy during periods of 
fuel transition and technology development. 
More mature fuels, such as natural gas, 
continue to beneﬁt from the technological 
and industrial infrastructure built up during 
previous decades.

The lack of consistent subsidy data is 
an obstacle to reaching more deﬁnite 
conclusions on the appropriateness of the 
amounts and structures of subsidies for the 
different fuels across the EU 15. There is 
a need for a harmonised energy subsidy 
reporting framework on the basis of an 
agreed deﬁnition. There are also a number 
of other aspects that should be duly taken 
into account in the subsidy debate.

Energy market liberalisation and privatisation 
have led to lower energy prices, greater 
price volatility and increased commercial 
risk for new capacity investment across all 
fuel types. Energy planners have begun to 
voice concerns over current limited levels 
of private sector investment in new capacity, 
given projected energy demand growth 
over the next 30 years. These concerns are 
heightened by the projected retirement 

1   EU 15 corresponds to the pre-May 1 2004 EU Member States.
2   There has been a reduction in support to coal production over the past years in a number of Member States, 
leading to reductions in coal production in these countries. These reductions may lead to domestic coal being 
replaced in the short term, at least in part, by imported coal (Mountford, 2000). However, it has been argued 
that in the medium and longer term, as the markets react to the ensuing higher coal prices, there would 
probably be increased use of gas and renewable energies (OECD, 2004).

3   It should be noted that renewable energy sources, such as large hydro-electric power, energy crops and wind 

turbines (when placed near bird sanctuaries), can have signiﬁcant environmental impacts.  

6

Energy subsidies in the European Union: A brief overview

of a substantial number of fossil fuel-
ﬁred plants in the EU 15. A forced delay 
in decommissioning of these plants to 
ensure supply will increase greenhouse gas 
emissions.

At current levels of political and ﬁnancial 
support, the EU 15 renewable energy 
targets for 2010 will not be met. Renewable 
technologies offer the beneﬁts of both 
increased energy security and reduced 
environmental impacts. The policy rationale 
for their economic support will most likely 
be strengthened as their contribution to 
reducing price volatility and overall emissions 
is better understood and quantiﬁed.

Unlike governments, individual companies 
carry little or no obligation to address long-
term energy security or environmental 
challenges. It is the responsibility of 
governments to ensure, through market 
pricing and legislative frameworks, that 
the market responds to these concerns. 
Governments would be prudent to value the 
environmental and security of supply beneﬁts 
of renewable energies and to set long-term 
price signals for industry development that 
reﬂect these beneﬁts.

Introduction

7

2.  Introduction

This report has been prepared for the 
International Renewables Conference 
in Bonn in June 2004. It sets out a brief 
deﬁnition, rationale and reporting overview 
of energy subsidy, and provides an indicative 
estimate of subsidies by fuel type in the 
EU 15. The report also discusses aspects 
of historical levels of support to energy 
fuels, and summarises ﬁndings on both the 
environmental external costs from energy 
sources and the role of renewable energies 
in diversifying energy supply and reducing 
import dependence. 

Due to data and time limitations, the report 
does not examine the issue of energy 
conservation subsidies and includes only the 
EU 15.

Economic and policy context

Energy subsidy reform and the environment. The 
sixth environmental action programme of 
the European Union encourages ‘reforms 
of subsidies with considerable negative 
effects on the environment and that are 
incompatible with sustainable development’ 
and emphasises the need to undertake ‘as 
soon as possible an inventory and review 
of subsidies that counteract an efﬁcient 
and sustainable use of energy with a view 
to gradually phasing them out’ (European 
Parliament and Council, 2002).

According to the OECD (2004), ‘In 
general, subsidies supporting fossil fuels 
— particularly coal and oil — represent 
greater threats to the environment than 
those that aid renewable energy sources. 
Those that support nuclear power contribute 
to unique environmental and safety issues, 
related mostly to the ‘risk’ of high-level 
environmental damage, rather than ongoing 
degradation4. Subsidies to renewable energy 
are generally considered, on balance, 
environmentally beneﬁcial, although the full 
range of environmental effects of renewable 
energy (including those beyond the energy 
sector) need to be taken into account.’ 

Renewable energy targets5. EU countries have 
committed to 2010 indicative renewable 
energy targets6. Discussions on more 
ambitious 2020 targets7 have begun, driven 
to a large extent by an interest in spurring 
technological development, improving 
energy security and reducing environmental 
impacts (including those related to climate 
change). Renewable energy is forecast to 
be a signiﬁcant component in meeting 
new demand (International Energy Agency 
— IEA, 2003a). However, these targets are 
unlikely to be met on the basis of current 
policies and measures.

4   Nuclear power contributes positively to the environment in the areas of air pollution and climate change as it 
does not emit greenhouse gases or air pollutants. The question of how to safely store long-lived radioactive 
nuclear waste remains unresolved. 

5   At the World Summit on Sustainable Development in Johannesburg in 2002 an agreement was reached to 

increase urgently and substantially the global share of renewable energy sources. A 'coalition of the willing' was 
formed at the summit that includes countries and regions willing to set themselves targets and timeframes for 
the increase of renewable energy sources in the energy mix. More than 80 countries are now members of this 
coalition including EU Member States.

6  The targets indicate a 12 % share of gross inland energy consumption (European Commission, 1997) and a 

22 % share of electricity (European Parliament and Council, 2001) produced from renewable energy sources by 
2010, and a 5.75 % share of biofuels in petrol and diesel for transport purposes by 2010 (European Parliament 
and Council, 2003).

7   The European Parliament called for a target of 20 % for renewable energy as a share of gross inland energy 

consumption by 2020 (European Parliament, 2004). The European conference for renewable energy in Berlin, 
January 2004 which was a preparatory conference to the international renewable energies conference in Bonn, 
June 2004, concluded that a 'target of at least 20 % of gross inland energy consumption by 2020 for the EU is 
achievable'. 

8

Energy subsidies in the European Union: A brief overview

Liberalisation and new capacity. Since the 
1990s, the energy sector in western Europe 
(particularly the electricity sector) has 
undergone signiﬁcant liberalisation and 
privatisation, resulting in declining and 
more volatile (ﬂuctuating) electricity prices. 
Existing fossil fuel and nuclear generators, 
established with public money and beneﬁting 
from depreciated assets, have lower marginal 
costs than new renewable technologies and 
are better able to manage the downward 
price pressures. To some extent, electricity 
prices in the EU 15 reﬂect only the marginal 
costs of production from existing capacity 
and do not include a contribution to the 
capital cost of the capacity used (or to the 
capacity that will be needed to replace this 
when it is retired). This fact and volatile 
energy prices have created barriers to 
private investment in new capacity, resulting 
in falling reserve margins in a number of 
countries compared with those present in the 
1990s as the replacement of old capacity lags 
behind retirement. 

Delayed retirement and carbon dioxide emissions. 
Without additional measures, annual power 
sector emissions are expected to rise by 
a third in the EU 15 by 2030 (from 2000 
levels) as a result of a forecasted increase 
in energy demand during the same period 
(IEA, 2003a). A substantial number of 
fossil fuel plants in Europe are due to be 
decommissioned. However, the increased 
capacity investments required to replace 
these plants might give rise to pressure to 
defer those decisions. If fossil fuel plants 
remain in operation longer than currently 
assumed in the projections, carbon dioxide 
emissions will be much higher.

The private sector carries no obligation 
to address long-term energy security or 
environmental issues. It is the responsibility 
of governments, through market pricing 
and appropriate regulatory frameworks, to 
ensure that the private sector adequately 
responds to these challenges. A debate on 
reforming energy subsidies ought to take 
these considerations into account.

3.  Energy subsidies — an overview

Energy subsidies — an overview

9

Governments have justiﬁed ﬁnancial 
intervention in the energy sector on the basis 
of one or more of the following aims: 

Security of supply. Since the oil crisis of the 
1970s, governments have used subsidies to 
ensure adequate domestic supply. Subsidies 
have been provided to support indigenous 
fuel production in order to reduce import 
dependency. Energy subsidies have played 
an important role in a wider geo-political 
context8, often to support overseas activity by 
national energy companies.

Environmental improvement. Energy subsidies 
have also been used to reduce pollution 
(sulphur dioxide, nitrogen oxide, 
particulates or greenhouse gas emissions), 
and to fulﬁl responsibilities under related 
international protocols and treaties. While 
they do not internalise external costs, they 
compensate for imperfections in market 
pricing. 

Economic beneﬁts. Energy subsidies in the form 
of reduced prices are sometimes used to 
stimulate particular sectors of the economy 
or segments of the population. They can also 
build domestic industrial sectors and provide 
opportunities for growth and export in 
energy technology markets. 

Employment and social beneﬁts. Energy subsidies 
are often used to maintain local employment, 
especially in periods of economic transition. 
The political imperative to protect jobs has 
been a major factor in the aid provided to 
the German9 and Spanish coal industries.

Reforms to subsidies are resisted for a range 
of reasons, commonly known as ‘lock-in 

mechanisms’. Those in receipt of economic 
support may use their economic and political 
inﬂuence to maintain a given subsidy regime 
(rent seeking). On an international stage, 
individual governments ﬁnd it difﬁcult to 
pursue subsidy reform or elimination for 
fear of ceding markets to other nations not 
pursuing a similar agenda10. Arguments may 
also be made that the removal of subsidies 
will not result in the desired positive effects 
in the short term (e.g. abolition of domestic 
coal subsidies may lead to a switch to 
cheaper imported coal, rather than cleaner 
technologies)11, or that subsidised industries 
return more to the state in tax than they 
receive. 

Deﬁning energy subsidies 

Within the EU, there is no agreed deﬁnition 
of energy sector subsidies, though the 
Producer Subsidy Equivalent12 is reported 
for the coal industry on an annual basis.

The OECD (1998) deﬁnes subsidies as: ‘any 
measure that keeps prices for consumers 
below market levels, or for producers above 
market levels or that reduces costs for 
consumers and producers.’

Energy subsidy deﬁnitions that refer only to 
a direct cash payment to an energy producer 
or consumer ignore a range of other indirect 
support mechanisms, including tax measures, 
and the effects of trade restrictions and 
other government interventions (such as 
purchase obligations and price controls) 
on prices received by producers and paid 
by consumers. Table 1 provides a broad 
overview of the various types of support. 

8   A recent World Bank review of extractive industries shows that 94 % of World Bank funding has gone to the 

development and exploitation of fossil fuel resources world-wide (World Bank, 2003).

9   The German Federal Environment Agency (2003) compared the subsidies received by the German coal industry 
with the number of employees in this sector. It concluded that safeguarding employment in the coal sector for 
2001 was costing EUR 82,000 a year in subsidies for each coal miner’s job saved.  

10 It should be noted that, in many developing countries, the costs of coal and oil production are low and are not 

supported by government subsidy.

11 For an alternative view, see Steenblik and Coroyannakis (1995). 
12 The Producer Subsidy Equivalent counts budgetary transfers including tax expenditures and market price 

support arising from price regulations and trade restrictions.

10

Energy subsidies in the European Union: A brief overview

Table 1  Types of energy subsidy

Government intervention

Examples

Direct ﬁnancial transfers

Preferential tax treatments

Grants to producers
Grants to consumers
Low-interest or preferential loans to producers

Rebates or exemption on royalties, duties, producer levies 
and tariffs
Tax credit
Accelerated depreciation allowances on energy supply 
equipment

Trade restrictions

Quota, technical restrictions and trade embargoes

Energy-related services provided by 
government at less than full cost

Regulation of the energy sector

Failure to impose external costs

Direct investment in energy infrastructure
Public research and development
Demand guarantees and mandated deployment rates
Price controls
Market-access restrictions
Preferential planning consent and controls over access to 
resources
Environmental externality costs
Energy security risks and price volatility costs

Source: Table adapted from IEA/UNEP (2002).

The last item in Table 1 refers to an absence 
of government intervention and hence a 
failure to ensure that costs and beneﬁts 
are fully reﬂected in prices. While failure 
to impose external costs is not a subsidy 
in the traditional sense, it nonetheless 
subsidises users by permitting a transfer of 
these costs from the private to the public 
domain. External costs vary considerably 
among energy sources and, were these to be 
accurately reﬂected in prices, certain sectors 
would beneﬁt at the expense of others. The 
difﬁculty comes in quantifying these external 
costs with a level of certainty sufﬁcient for 
policymaking. Externalities are therefore not 
included in the energy subsidy estimates in 
the following section.

Subsidies can be classiﬁed in many ways: 
initial incidence (consumers or producers; 
outputs, intermediate inputs or value-adding 
factors), instrument, pathway of beneﬁt 
(direct or indirect, explicit or implicit), 
purpose (Steenblik, 2003). The major 
economic issue is whether they are oriented 
towards production (initial) or consumption 
(ﬁnal) and whether they are tied to speciﬁc 
inputs or technologies (wind turbines) or 
outcomes (wind generated power). This 
report does not assess which form of support 
is more suitable or efﬁcient. Instead, a simple 
‘on-budget’ and ‘off-budget’ classiﬁcation 
has been used, as this allowed a level of 
transparency. On this basis, it was possible to 
obtain a sufﬁcient amount of data to provide 
estimates of the size of the subsidies to the 
different energy sources.

Aid to the coal sector 
On-budget aid to the EU coal industry is authorised under a Council Regulation which replaced 
the expired European Coal and Steel Community (ECSC) treaty in July 2002. This allows for the 
continued support of domestic coal mining in the remaining coal producing Member States until 
2010. In 2001, under the ECSC treaty, the amount of aid granted was approximately EUR 6.3 
billion. 

Energy subsidies — an overview

11

On-budget subsidies are cash transfers paid 
directly to industrial producers, consumers 
and other related bodies, such as research 
institutes, and appear on national balance 
sheets as government expenditure. Grants 
may be given to producers, mainly to 

support commercialisation of technology or 
industry restructuring, and to consumers. 
On-budget subsidies also include low interest 
or reduced-rate loans, administered by 
government or directly by banks with state 
interest rate subsidy. 

Infrastructure subsidies to the gas industry in the EU 15 
On-budget aid to the gas industry through infrastructure development continues to be 
permitted by the EU to:
•  promote the economic development of a region where the standard of living is low, and create 

local employment; 

•  extend the gas network to guarantee security of supply, thereby extending the use of an 
energy source whose combustion generates lower emissions than burning coal or oil; 
•  be in line with EU policy, in particular with regard to developing trans-European energy 

networks.

Between 1996 and 2000, state aid to gas infrastructure was approved by the EU to projects in 
Denmark, Greece, Ireland, and Spain. On-budget subsidies are also given to the gas industry 
by the EU. Between 1996 and 2000, these included structural funds of EUR 2 billion, and EUR 3 
billion in preferential loans from the European Investment Bank. 

Off-budget subsidies are typically transfers to 
energy producers and consumers that do not 
appear on national accounts as government 
expenditure. They may include tax 
exemptions, credits, deferrals, rebates and 
other forms of preferential tax treatment. 
They also may include market access 
restrictions, regulatory support mechanisms, 
border measures, external costs, preferential 
planning consent and access to natural 
resources. Quantifying off-budget subsidies is 
complex, in some cases impossible. It often 
requires that the beneﬁt be calculated on 
the basis of differential treatment between 
competing fuels, or between the energy 
sector and other areas of the economy. 

Taxation policy is a key mechanism for off-
budget support in energy markets. A fuel 
may be exempted from certain taxes, or 
enjoy lower rates of value added tax (VAT) 
and excise duty in relation to other fuels 
or to the wider economy. Tax exemptions, 
rebates and incentives for investments in 
the energy sector and for the installation 
of energy related materials and equipment 
may allow industry and consumers to offset 
their costs. Accelerated tax depreciation may 
also be permitted, allowing energy-related 
equipment to be amortised (have the costs 
written off) more quickly, thereby lowering 
effective tax rates in the early years of an 
investment. 

Tax incentives for exploration and production of oil and gas 
Producer countries, such as Denmark, the Netherlands and the UK, support the exploration and 
production of oil and gas through use of the taxation system: 
•  Denmark has abolished the payment of royalties on gas and oil production. 
•  Ireland has implemented a pre-exploration preferential tax scheme for oil. 
•  Tax exemptions have been provided to less proﬁtable Dutch gas ﬁelds. 
•  In the UK, taxation levied on new gas ﬁelds developed since 1993 has been lowered, creating 

an incentive for investment, especially for smaller gas ﬁelds or ﬁelds where exploration is 
difﬁcult.

12

Energy subsidies in the European Union: A brief overview

Calculating the beneﬁts individuals and 
companies derive from tax exemption 
policies is complex. Tax rebates, such as 
for fuels, are usually conferred on a per 
volume basis, which means that estimating 
the total amount of exemptions or rebates 
requires detailed consumption or production 
data. The scale of these subsidies must 
be calculated on the basis of differential 
treatment against a norm or baseline. 
Judgement must therefore be applied in 
determining the base for comparison against 
which the implicit subsidy can be calculated. 
If all fuels are taxed equally, then the effect 
of the subsidy on competition between 
fuels would effectively be zero. If a tax is 
levied on only some fuels, then the fuels 
that are exempt are relatively subsidised. In 
addition, consumption of all fuels may be 
taxed at a lower rate than on other goods 
and services in the rest of the economy, as 
is the case with lower-than-standard VAT on 
electricity in many countries. It remains an 
area of contention whether this should be 
considered an energy subsidy, but it has been 
included for the purposes of the estimation 
in the following section.

Environmental externality costs can be 
internalised through taxation, such as the 
imposition of carbon dioxide taxes favouring 
carbon-neutral or zero-carbon sources of 
energy. The aim of such taxation policy is 
to correct market imperfections; therefore 
such indirect beneﬁts are not subsidies13, 
and they have not been included in the 
estimates. It should however be noted that 
it is difﬁcult to assess how well governments 
have linked environmental taxation to actual 
environmental costs and outcomes. 

Regulatory support mechanisms make up the 
other most signiﬁcant area of off-budget 
support for the energy sector. These 
mechanisms most commonly take the form 
of price guarantees and demand quotas for 
speciﬁc energy sources. They are introduced 
to support environmental, economic, 
employment or energy security policy 
objectives. Some of these mechanisms, such 
as feed-in tariffs or competitive tenders can 
be described as ‘supply push’ mechanisms, in 
that they stimulate production. Others, such 
as purchase obligations are ‘demand pull’ 
mechanisms in that they create an artiﬁcial 
demand to which the market responds.

An overview of regulatory support mechanisms for renewable energies
Fixed feed-in tariffs have been widely and successfully deployed throughout Europe to support 
renewable technologies, most notably in Denmark, Germany and Spain. Governments set a 
price at which the country’s electricity supply companies must purchase all renewable energy 
delivered to the distribution grid. Price premiums are passed on to consumers in the form of 
higher electricity prices.
Competitive tender invites producers to bid to provide speciﬁc amounts and types of renewable 
energy from the market at cap (maximum price) or below cap (lower) prices. Contracts are then 
signed with the lowest cost bid to deliver output over a number of years. End consumers pay the 
premium on wholesale price through a levy.
Purchase obligations set targets for consumption of electricity (usually percentage based) that 
should be sourced from a certain fuel source. This mechanism has been deployed for renewables 
and combined heat and power in several Member States. Energy distribution companies 
must prove the origin of purchase, pay a penalty or produce the required amount themselves, 
creating an artiﬁcial demand and price premium for renewable generation. If the overall system 
target cannot be met, prices rise until new market entrants and investors are attracted. Tradable 
certiﬁcates often accompany such schemes. The cost of this subsidy is borne by consumers.
Adapted from Irish Government (2003) pp. 31–36

13 Provided the taxes were set proportionally to the externality. 

4.  Estimating energy subsidies in the EU 15

Estimating energy subsidies in the EU 15

13

Various attempts have been made to quantify 
the type and amount of aid provided to 
energy industries. There is no comprehensive 
ofﬁcial record of historical and ongoing 
energy subsidies in the EU. Collation and 
presentation of information on energy sector 
support is fragmented and is managed by 
multiple actors: energy agencies, Member 
State governments, the International 
Energy Agency (IEA) and the European 
Commission. Only for the Producer Subsidy 
Equivalent have Member States agreed a 
format and annual reporting mechanism 
through the IEA.

A number of studies have attempted to 
throw light on support for energy sector 
within the EU 15. The most recent and 
comprehensive reports were prepared 
by Oosterhuis (2001) and the European 
Commission (2003a). Both are ‘snapshots’ 
based on best available information and are 
not ongoing monitoring projects. Other 
reports, e.g. Eurelectric (2004), have focused 
on speciﬁc industry support mechanisms 
such as renewables. This report synthesises 
available studies and reports to estimate the 
type and size of energy subsidies throughout 
the EU 15. Together, they provide at best 
an incomplete overview of energy-sector 
support for the period 1995–2001, indicating 
a total subsidy (excluding external costs) to 
the energy sector of about EUR 125 billion 
for the period, with the greatest recipients 
in France, Germany, Spain, and the UK. 
Oosterhuis (2001) estimates annual support 
(excluding external costs) to be in excess of 

EUR 27 billion. There is a lack of continuous 
and accurate data over time, and a lack of 
speciﬁc detail. Figures are often presented as 
a total sum for multiple years with no further 
breakdown.

Given the issues discussed above, this report 
presents a more detailed analysis for a single 
year, 2001, which is the most recent for which 
relatively reliable and comprehensive subsidy 
data are available. The analysis follows closely 
the work of Oosterhuis (2001) and includes 
a broad range of on- and off-budget energy 
support mechanisms, including subsidies 
arising from taxation differentials and the 
effects of regulatory price support. Subsidies 
for electricity are allocated to primary energy 
sources based on the share of thermal inputs. 
The data have been compiled from a range 
of primary sources (IEA R&D Database, 
2004; EU State Aid scorecard, 2003b; IEA 
World energy prices and taxes, 2003b) and 
secondary sources, including Eurelectric, 
2004; European Commission, 2003a; and 
Oosterhuis, 200114. 

Often, it is practically impossible to assign 
a monetary value to an individual support 
mechanism, due either to the nature of 
the mechanism itself (such as the ability to 
allocate priority to up to 15 % of indigenous 
fuels), or to lack of data. Where no attempt 
has been made in the reviewed literature, 
this report does not attempt primary 
calculations. For reasons explained in the 
previous section, uninternalised costs of 
environmental externalities are not included 
in the estimates. 

14The following provides a brief indication of source and methodology. Subsidies for coal under the ECSC treaty 
are taken from the European State Aid Scorecard (2003) and from the Commission staff working paper on 
energy subsidies (European Commission, 2003a). Aid to the oil and gas, and nuclear sectors is based primarily 
on the European Commission (2003a) and Oosterhuis (2001) reports. Renewables data on direct price support, 
such as quota and ﬁxed price systems, is are taken primarily mainly from the Eurelectric (2004) report, with 
cross-referenced information from the EREF (2002) and Irish Government (2003) reports. Data on renewables 
capital investment, taxation support and other aid to related sources is taken from European Commission 
(2003a) and Oosterhuis (2001). Research and development subsidies paid by Member States to all fuel sources 
are taken from the IEA R&D database (2004), while those paid by the European Community are taken from 
European Commission (2003a) and Oosterhuis (2001). Fuel taxation exemptions/differentials represent an 
updated version of the Oosterhuis report and are calculated using IEA (2003b) energy prices and tax data, 
and consumption/production ﬁgures using Eurostat 2001 data. Data on preferential tax treatment for medium 
and large users of gas and electricity in the Netherlands is taken from Van Beers et. al (2002); and it is the 
arithmetic mean of the data that has been used. Electricity consumption subsidies represent updated versions 
of the Oosterhuis report using more recent taxation and consumption data, and are allocated to individual fuels 
on the basis of Eurostat 2001 data on primary energy inputs in the generating mix.

14

Energy subsidies in the European Union: A brief overview

The results are given in Table 2, which 
provides a summary of the estimated total 
2001 support provided to the various 

energy fuel sectors. These ﬁgures should 
be regarded as indicative, due to the lack of 
consistent data and assumptions made. 

Table 2  2001 Indicative estimates of total energy subsidies, EU 15, (EUR bn) 

Solid fuel

Oil and gas

Nuclear

Renewables

Total

2001 On- budget

2001 Off- budget

Total

> 6.4

> 6.6

> 13.0

> 0.2

> 8.5

> 8.7

> 1.0

> 1.2

> 2.2

> 0.6

> 4.7

> 5.3

> 8.2

> 21.0

> 29.2

Note: Electricity subsidies allocated to fuels on basis of generation inputs. Excludes external costs. 

Solid fuels received the largest share of 
on- and off-budget subsidies in 2001. The 
renewables industry received signiﬁcantly 
higher support on a per-energy unit basis 
than other fuel sources in the majority of 
Member States. This can be attributed to 
the relatively young age of the industry and 
the limited levels of current consumption. 
Subsidies to the various fuel groups are 
outlined as follows:

Solid fuels. On- and off- budget support to the 
coal industry is the single most important 
funding regime in the EU 15. State ﬁnancing 
to coal mines was commonplace throughout 
the last century, and exists today in a more 
rationalised form to protect high-cost 
domestic industries from competition with 
cheap foreign coal imports. On-budget 
subsidies continue to the coal industries 
in Germany (over EUR 4 bn), Spain (over 
EUR 1 bn), and the UK (circa EUR 0.1 bn), 
whereas subsidies in other countries, such as 
Belgium, France15, Ireland, the Netherlands 
and Portugal have more or less ceased. 
Germany and Spain are still committed to 
sustaining their output, and use subsidies 
to reduce producer costs in order to align 
consumer prices with imports. The UK uses 
subsidies to support industrial restructuring. 
Off-budget support to coal is particularly 
high in Germany (circa EUR 3.5 bn) as coal 
remains untaxed under the ecological tax 
reform introduced in 1999. In Denmark, 
reduced rates of energy and carbon dioxide 
taxation for energy intensive industries 

(those holding an energy efﬁciency voluntary 
agreement with the Danish Energy Agency) 
indicated an estimated EUR 0.6 billion off-
budget subsidy.

Oil and natural gas. There is little aid to 
investment in the oil sector, reﬂecting the 
fact that the bulk of oil reserve development 
is occurring outside Europe. The industry 
across Europe is largely privatised and 
receives no on-budget aid for oil production, 
transport or storage. Italy, the Netherlands 
and the UK provide the highest level of 
support to the oil and gas sector. In the 
Netherlands, preferential tax treatment 
under the regulatory energy tax for medium 
and large users of gas is signiﬁcant (estimates 
range from EUR 0.9 to EUR 2.4 bn). The 
UK supports oil and gas with reduced rates 
of VAT (5 %) on domestic oil and gas (circa 
EUR 1.4 bn), while Italy allows reduced VAT 
rates (10 %) on domestic gas (circa EUR 0.9 
bn). 

Nuclear power. The on-budget support to 
nuclear energy comes from R&D grants by 
Member States (mainly France, Germany and 
Italy) and the European Community. The 
ﬁgures in Table 2 exclude the potential cost 
of not having to pay for full-liability insurance 
cover for a critical nuclear accident or fuel 
incident since commercial and state liabilities 
are limited by international treaty. This 
risk would be too large to be commercially 
insurable.

15 France is in the process of closing its last coal mine. In 2001 (as well as in 2002 and 2003), France subsidised 

the restructuring of the coal industry by almost EUR 1 billion per year.

Estimating energy subsidies in the EU 15

15

Renewable energy. Support for renewable 
energy is now well established across the 
EU 15. Every Member State provides a 
combination of price support through feed-
in tariffs, obligations or competitive tender, 
together with a range of capital subsidies 
and ﬁscal mechanisms (Table 3). In 2001, 
total levels of support were greatest in 
Germany and Italy, where over EUR 1 billion 
was provided, mainly in the form of feed-in 
tariffs.

Electricity. Preferential treatment under the 
regulatory energy tax for medium and large 
users of electricity provided a subsidy in 
excess of EUR 1.5 billion in the Netherlands. 
Elsewhere, reduced VAT on electricity in 
the UK (circa EUR 1.5 bn) and reduced tax 
rates in Germany for industry and agriculture 
(circa EUR 1.8 bn) contributed to over 
EUR 6 billion of subsidies to electricity 
consumption across the EU 15.

Table 3  Support policies for renewable technologies in the EU 15

Country

Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK

Capital 
subsidies
X
X
H
X
X
X
X
X
X
X
X
X
X
X
X

Feed-in 
tariffs
X
X
X

Competitive 
tender

Certiﬁcates/ 
obligations
H
X

X
X
X

H
X
X
X
X

X

X

H

X

X

X
X

Fiscal 
mechanisms
X
X
X
X
X
X
X
X
X

X
X
X
X
X

X: Mechanism currently present  
H: Historical policy, now changed 

Source: Adapted from Stenzel, Foxon and Gross (2003).

It is not possible to make accurate temporal 
comparisons. However, it is clear that support 
for renewables has increased signiﬁcantly 
over recent years. Support for coal and 
nuclear may have been in gentle decline 
due to redirection of investment towards 
infrastructure for natural gas and renewable 
energy. 

State ownership and transparency

It is difﬁcult to quantify the economic 
beneﬁts a ﬁrm receives by virtue of state 
ownership. Concern has been expressed 

over the lack of transparency regarding the 
internal ﬁnancing and accounting practices 
of state-owned ﬁrms, and a number of cases 
involving illegal state aid have been reported.  

Across the EU 15, there are currently 12 
fossil-fuel companies and a smaller number 
of nuclear generators in which national 
governments retain majority or signiﬁcant 
minority ownership. These are former state 
monopolies that have played a major role in 
infrastructure development, production and 
distribution over a number of decades. There 
are no state-owned companies whose primary 
activity is the development and production of 
renewable energy. 

16

Energy subsidies in the European Union: A brief overview

5.  Historical perspective

It is not possible to assess historical support 
levels which well-established energy sources, 
such as oil, natural gas, and ﬁssion-based 
nuclear power, received during their 
developmental phases. Such subsidy data are 
largely unavailable. However, there is some 
evidence to suggest that the infrastructure 
for mature fuels beneﬁted signiﬁcantly 
from support received under state 
ownership. Such support was generally in 
the form of R&D, capital investment and the 
subsidisation of operating costs.

These energy sources continue to beneﬁt 
from state-assisted infrastructure and 
technology. Oosterhuis (2001) highlights 
the cases of Denmark and the Netherlands, 
where signiﬁcant historical investment in the 
natural gas network, through ﬁscal measures 
and tariffs, has created a gas infrastructure 
that continues to beneﬁt consumers after 
the support measures have been withdrawn. 
Energy consumers pay prices lower than 
might be expected if a similar capacity had 
been funded on purely commercial terms.

Renewable energy, with the exception of 
large hydro-electric power, represents a 
range of technologies still in their infancy. 

Due to R&D inputs and wider commercial 
application, the capital costs of renewable 
energy are expected to fall substantially, 
making production from renewable energy 
sources increasingly competitive, although 
this will be heavily inﬂuenced by regional 
factors. Improvements in wind-turbine 
technology and greater efﬁciencies in 
biomass conversion are expected (IEA, 
2003). Currently, several of the technologies 
are approaching commercial maturity, 
including on-shore wind power, small-scale 
hydropower, biomass and solar-thermal water 
heaters. Others, such as photovoltaic electric 
cells, are further from being competitive with 
current market prices. It is clear that all will 
beneﬁt from increased production volume 
and technological investment (European 
Commission, 2004).

Research undertaken in the United States16 
provides a useful indicator of the respective 
levels of total subsidy support for nuclear 
power and wind power at similar stages of 
technological development. Goldberg (2000) 
estimates that the nuclear industry received 
about 30 times more support per kWh output 
than wind power in the ﬁrst 15 years of the 
industry’s development (Table 4).

Table 4  Nuclear vs. renewable industry development, USA

15 year industry 
development period

Gross electricity 
production (bn 
KWh)

Effective subsidy  
(USD/KWh)

Total subsidy 
over 15 year 
period (billion 
USD)

1999 generation  
(bn KWh)

Nuclear (1947–1961)

Wind (1975–1989)

2.6

1.9

15.3

0.46

39.4

0.9

727.9

3.5

Source: Goldberg (2000).

The study indicates that the support for 
technological development for nuclear 
power, when compared with renewable 
energy sources over a period of 15–25 years, 

allowed the creation of economies of scale 
in the industrial infrastructure, from which 
the industry has obtained a competitive 
advantage.

16 A high proportion of generation capacity in the United States since 1945 has typically been in private ownership 
rather than being state controlled. This has resulted in a greater level of transparency in ﬁnancial transfers and 
support than has been the case for EU Member States.

 
Addressing market failures

17

6.  Addressing market failures

The areas of subsidy previously highlighted 
are examples of government intervention in 
energy markets in order to achieve particular 
economic, social, environmental or political 
outcomes. Another aspect of the state’s 
relationship with the energy market must 
also be raised: the failure to intervene in the 
case of market failure. This study examines 
two such speciﬁc areas. 

Environmental and social 
externality costs

Fuel cycle externalities are the costs imposed 
on society and the environment that are 
not accounted for by the producers and 
consumers of energy, i.e. are not included 
in the market price. They include damage 
to human health, the natural and built 
environment, and include non-compensated 
effects of air pollution, occupational disease 
and accidents. They also include the external 
costs of climate change. 

In theory, if the costs of energy sector 
external impacts are known, they should be 

incorporated into the price of the energy 
activity concerned. In that way, producers, 
consumers and decision makers could get 
accurate price signals and reach optimal 
decisions about how to use the resources. In 
practice, the measurement of environmental 
impacts and associated costs is a complex and 
evolving science, and neither markets nor 
governments effectively price these costs. EU 
governments have recognised this and have 
invested in modelling, in particular through 
the European Commission’s on-going ExternE 
project. 

Table 5 shows the aggregated ranges of 
external costs associated with the electricity 
production fuel cycle in the EU 15, as 
calculated with data from ExternE. 

ExternE research has demonstrated so far 
that most renewable energy sources have 
signiﬁcantly lower environmental impact 
per KWh than fossil fuels, and have similar 
immediate impacts to nuclear power17, without 
the same risk of accident. 

Table 5  External costs of electricity production in the EU 15 (EUR bn/Year) 18

Low range estimate

High range estimate

Solid fuels

Oil and gas

Nuclear energy

Renewables

25.6

12.0

2.7

2.0

Source: European Commission (2003c), Eurostat.

46.2

21.4

2.7

2.7

17 The calculation of externalities from nuclear power excludes mortality and morbidity associated with human 
exposure to high-level nuclear waste and the contribution of civilian nuclear power programmes to the risk 
of nuclear proliferation and terrorism, all of which have been considered too difﬁcult to value. In the same 
way, the risk of nuclear power accidents has not been fully priced. Oosterhuis (2001) reports that there have 
been various estimates of the economic cost of a large-scale nuclear accident, ranging from EUR 83 billion to 
EUR 5,469 billion. However, liability for nuclear accidents is currently limited by the Paris (1960) and Vienna 
(1963) Conventions and the Joint Protocol (1988). The liabilities can be as little as EUR 6.5 million for a single 
nuclear operator to EUR 390 million for national public liability. This could mean that 'The risks associated with 
the use of nuclear energy (…) are socialised, because the producers are not fully liable for the damage' (Irrek, 
2002). 

18 Figures based upon average high/low estimates of external cost data per KWh from European Commission 

report (2003c) on external costs and 2001 Eurostat gross electricity production data by fuel and by Member 
State. These ﬁgures provide an indicative range only and are presented with the caveats outlined by the 
ExternE team including extrapolation of data from individual measurements to sector and geography based 
models. There remain uncertainties in the monetary valuation of mortality effects, and from the omission of 
certain impacts on ecosystems due to acidiﬁcation, eutroﬁcation and global warming. In addition, the study 
does not take into account contamination of water and soil, and the impact of long-term accumulation effects. 

    
18

Energy subsidies in the European Union: A brief overview

Environmental costs are indirectly imposed 
through the setting of air quality, air emission 
and greenhouse gas emission regulations 
that are based partly on cost-beneﬁt analyses 
and partly on political considerations. 
In addition, as mentioned in section 3, 
environmental taxation policies also aim to 
partly internalise external costs. 

Valuing energy security and 
diversity — applying portfolio 
theory

Managing the risk associated with energy 
supply is an increasingly important policy 
driver. Security of energy supply covers a wide 
range of issues — from protecting energy 
distribution infrastructure from disruption, 
to diversifying sources of supply and 
developing strategic stockpiles. In economic 
terms, risk is best measured by price 
volatility. Governments have traditionally 
made planning decisions for new capacity 
based upon the lowest cost option between 
different technologies and fuels. This has 
tended to support more established fuel 
sectors rather than renewable technologies, 
which have higher capital costs but which 
may have other beneﬁts in terms of 
diversifying supply and reducing import 
dependence19. With investment decisions 
transferred to the private sector and 
downward pressure on electricity prices, the 
demand for lowest cost options has become 
even greater.

This creates problems for energy planners, 
who have recognised that ‘current market 
designs do not guarantee an adequate level 

of security of supply’ (IEA, 2003a). Over-
reliance on fossil fuels can increase fuel 
price volatility — the likelihood that energy 
prices will ﬂuctuate more widely and more 
often — and expose economies to signiﬁcant 
macroeconomic costs20.

Awerbuch and Berger (2003) examined 
the use of portfolio theory in reducing risk 
and potential costs and demonstrated that 
current energy mixes can be signiﬁcantly 
enhanced, and that by adding renewable 
energy to energy portfolios dominated by 
fossil fuels, price risk could effectively be 
hedged21. They compared the 2000 and 
projected 2010 EU 15 electricity generation 
mix and concluded that risk and cost can 
be reduced ‘by adjusting the conventional 
mix and including larger shares of wind or 
similar renewable technologies’ and that 
‘any expansion in natural gas should be 
accompanied by an increased deployment of 
renewables’. 

The presence of each primary fuel in an 
energy portfolio with minimised risk has a 
real economic value, but this is currently 
disconnected from mainstream discussion 
on subsidy mechanisms, energy models 
and private sector investment decisions. 
Further work needs to be done to quantify 
the economic beneﬁts of risk and cost 
management to ascertain the extent to which 
current levels of support reﬂect the potential 
beneﬁts of renewable energy. What is clear is 
that the role of technologies for exploiting 
renewable energy in diversifying energy 
price risk is not yet fully recognised by the 
market22.

19 Renewables also have lower variable costs.
20 According to Sauter and Awerbuch (2003), a number of studies have examined the link between increases in 

world oil price and reduction in economic activity as expressed in terms of GDP and have estimated that a 10 % 
rise in the oil price might cut GDP growth by 1.5 % for a period of 3–6 months following the price increase. 
Extrapolating this to the EU 15 would result in GDP reductions of between EUR 35 billion and EUR 70 billion. 
These calculations reﬂect a rise in world oil price, rather than the effects of volatility itself, and more work is 
required in this area.

21 Portfolio modellers seek to identify the 'efﬁcient' or optimal assets mix that produces the most economically 

efﬁcient outcome for a given level of risk: efﬁcient portfolios maximise expected return (or minimise expected 
cost) at any given level of risk, while minimising risk for every given level of expected return (Awerbuch and 
Berger, 2003).

22 Also to be considered is why taxpayers who are economical in their use of energy have to subsidise the 

contribution to economic risk created by proﬂigate users. This externality should be internalised, not socialised.

References

19

7.  References

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20

Energy subsidies in the European Union: A brief overview

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