The Ministry of Energy Transition (MITE) recently updated the “Catalog of environmentally harmful subsidies and environmentally friendly subsidies” for the years 2019 and 2020. In 2020, environmentally harmful subsidies amounted to 21.6 billion. The Observatory on Italian Public Accounts notes that, despite the entry into force in 2021 of measures to contain some of these subsidies, the recent measures adopted to limit the impact of the rise in energy prices on households and businesses will bring the value of SADs to 24.2 billion in 2021 and in a range between 28 billion and 35 billion in 2022 (depending on whether or not the measures introduced in the first quarter are reduced for the rest of the year).
What are the subsidies and how are they classified?
The ecological transition cannot be based only on regulations, prohibitions or voluntary approaches and good education; Economic instruments are also needed to correct environmental externalities, signal scarcity of resources and orient consumption and production towards more sustainable forms.
In this regard, the Ministry of Energy Transition (MITE) has recently published the fourth catalog of environmentally harmful and favorable subsidies with reference to 2019 and 2020.
In the catalog, a subsidy is defined as: ‘a measure which keeps prices for consumers below market levels, or keeps prices for producers above market levels, or which reduces costs for producers and producers. consumers, through direct or indirect support ». This very broad and general definition contains several types of subsidies. The latter are divided into:
1. Direct, which consist of direct transfers to producers and transfers of funds to cover costs;
2. Indirect, which consist of tax expenses, ie elective tax exemptions or discounts (eg tax credits, rate reductions, reduced guarantees for certain categories).
The distinction is legally important, but, in economic terms, it is not substantial. In fact, these are still benefits to a certain sector or activity. Furthermore, the subsidies are split between environmentally friendly (SAF) and environmentally harmful (SAD). However, sometimes the dichotomy between SAF and SAD may not be as marked, which is why the category of uncertain subsidies (AIS) is also included.
What was the total amount of SADs in 2020?
In 2020, of the 180 subsidies analyzed by the report, 61 were considered SAD, of which only 46 had a financial quantification. The expected cost of all 180 subsidies was around 54 billion euros (slightly lower than the 55 billion in 2019) while that for the 46 SAD with financial quantification was almost 22 billion (Table 1). These estimates have been updated in the latest edition of the Catalog with respect to those reported in previous years. In particular, in the past the estimate of the cost of SADs for 2018 was 19.7 billion (against the current 23 billion).
Which sectors benefit from SADs?
In 2020, most of the SADs disbursed, both in terms of number (36 out of 61) and cost (11.6 out of 21.6 billion), concerned the energy sector.
In this sector, the major subsidies included are:
• the 23 per cent difference between the excise duty on diesel (€ 17.30 / GJ) and that on petrol (€ 22.35 / GJ) and the additional discount on diesel fuel granted to hauliers. These two subsidies amount to 3.9 billion. The subsidy given to diesel compared to petrol is considered as environmentally harmful because it is not justified by a lower environmental impact;
• the reduction in VAT for household electricity (2 billion). This facility discourages efficient use of energy;
• the free allocation of the emission quotas envisaged by the Emission Trading System (the European system of greenhouse gas emission permits), with a loss of revenue of 1.4 billion. These quotas are totally free for the sectors most exposed to the risk of relocation for reasons of costs related to climate policies (or risk of “carbon leakage”) while only partially free for the less exposed sectors (the free quota has dropped from 80 to percent in 2013 to 30 percent in 2020).
In second place is housing, which goes to 6.2 out of 21.6 billion. This subsidy consists of the VAT rate of 22 to 10 percent on the sale of new homes as second homes, and 4 percent for first homes, both of which are non-luxury. These reductions are considered to be environmentally harmful because they have promoted new constructions rather than renovations, with an increase in urbanization and land use phenomena.
In third place there are transport subsidies (1.3 billion) which mainly include the favorable tax treatment granted to company cars. This subsidy is classified as SAD as it can incentivize the ownership of more cars and their greater use.
The report, in addition to the small category of subsidies to agriculture and fisheries (less than 300 million), includes a residual category of “other sectors” (2.3 billion). Within this aggregate, the largest item (1.3 billion) consists of the tax credit for the purchase of new capital goods intended for production facilities located in the southern regions. The subsidy is classified as SAD because it favors investments in new or existing production facilities regardless of their energy and environmental performance.
News for SADs between 2021-2022
From a regulatory point of view, the main novelty was the entry into the fourth phase of the EU ETS starting from 2021. Other things being equal, this should have led to a slight decrease in SADs. In fact, the directive provided that the number of sectors classified at risk of relocation (those that receive emission allowances free of charge) will increase from 180 in the 2015-2020 period to 60 in the 2021-2030 period.
However, the amount of SADs in 2021, and even more so in 2022, will increase markedly due to the policies that are being adopted to contain the impact on users of the increase in the prices of energy products on international markets. The increases for users were high (Fig. 1), but they would have been even higher without the reduction of system costs, the strengthening of the social bonus for families in difficulty, the introduction of an installment plan for bills and the reduction of the VAT rate on gas bills to 5 percent. State intervention is estimated to decrease the increase in electricity bills in the first quarter of 2022 from 65 percent to 55 percent and gas bills from 59.2 percent to 41.8 percent. So far, the measures put in place amount to 4.7 billion in 2021 and 5.5 billion in 2022.
Gas subsidies are clearly to be considered SAD. For those on electricity, 58 percent can be considered SAD, this being the share of electricity produced with fossil fuels. This would bring SADs to 24.2 billion in 2021. In 2022, SADs would rise to 27.9 billion if the recent subsidies were gradually reduced after the first quarter and 34.5 billion if they continued unchanged (net of the seasonality of gas consumption and electricity) until December (Fig. 2). It should be added that the financing of part of the subsidies introduced for the first quarter of this year was financed for 1.5 billion with the taxation on the “extra profits” of renewable energy producers, that is, reducing (in net terms) the environmentally favorable subsidies .
