A review published on 31 January 2022 by the European Court of Auditors entitled Energy Taxation, Carbon Pricing and Energy Subsidies notes that the EU countries tax and subsidise energy sources in a manner that contradicts their climate goals; and the majority of EU member countries provide more support to fossil fuels than to renewable energy.

The review of the various measures in place in the 27 member states of the EU shows that the amount by which the various energy sources are taxed does not reflect the amount of their greenhouse gas emissions. Energy sources that are more polluting, such as coal, may in some cases receive a tax advantage by comparison with energy sources like natural gas that have better carbon efficiency.

The report notes that low carbon prices and low energy taxes can delay the energy transition by increasing the relative cost of greener technologies. Subsidies for fossil fuels have been generally unchanged in the past ten years and amount to between EUR 55 billion and EUR 58 billion per year. Much of the subsidy is in the form of tax exemptions or reductions.

The European Commission and some of the EU member states have made a commitment to phase out subsidies on fossil fuels by the year 2025, but the report notes that this will be a challenging transition with significant economic and social costs.

The report notes that subsidies for renewable energy almost quadrupled between 2008 and 2019 and the use of renewables in the production of electricity increased in all the EU member countries in that period.

The EU has made a commitment, within the European Green Deal, to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.

In July 2021 the European Commission unveiled a proposal to amend the Energy Taxation Directive to address weaknesses in the energy tax laws and bring taxation levels more closely in line with energy content and the environmental impact of energy carriers.

The proposal also included plans to extend the Emission Trading System to cover maritime transport, and to bring in another separate emission trading system for road transport and buildings. Free allowances linked to a risk of carbon leakage would be phased out as the Carbon Border Adjustment Mechanism began to be phased in. As a total package these proposals would tax energy use and price greenhouse gas emissions on a wider scale than the current measures.

The report by the auditors emphasises the need for climate objectives to be reconciled with social needs. If there is a public view that certain social groups are being treated unfairly this could negatively affect progress towards cleaner energy.

The report also notes that the right balance has to be found between regulatory and financial measures. If subsidies and regulatory standards are both well targeted, they can reinforce taxation support for greener energy and energy savings.