[24.01.23] Blog – The EU emissions Trading System (2) and energy poor households

By Emmanuelle Causse, UIPI.

The EU Emissions Trading System (ETS), introduced in 2005, puts a price on greenhouse gas (GHG) emissions to foster EU emissions reductions. Under the Fit for 55 Package, the ambition for ETS was further increased, and a separate carbon market, ETS2, is also being created for buildings and road transport.  

The co-legislators, the European Parliament and the Council, have reached a deal on 18 December 2022 that will, once confirmed, bring about a new era for the emissions reduction. European Union negotiators agreed to increase the overall ambition of emissions reductions by 2030 in the sectors covered by the EU ETS to 62% with the newly confirmed ETS2.

The new ETS2 system will apply to distributors that supply fuels to buildings, road transport and certain other sectors. Practically, this means that those who heat their homes with gas or oil will see their fuel heating bills rise at a time when millions of Europeans are struggling to cover their expenses during a cost-of-living crisis.

Strongly criticized, this proposition was highly debated during the legislative process. Parliament and many of the EU’s poorer countries feared that it would deepen fuel poverty and put the bloc’s vision for a “just transition” at risk. Many also warned of a backlash akin to 2018 France’s Yellow Jackets social unrest when the government hiked taxes on diesel, thereby hitting consumers hard. The protests over the rising cost of living and the perceived injustice of often making the less wealthy citizens pay for climate measures forced a U-turn from the French government.

The consecutive outburst of the energy crisis and the Ukrainian war have now exacerbated the challenge. While millions of Europeans are struggling to pay their bills, it ultimately came down to whether, when and to what degree European households should be burdened with the cost of their emissions. The discussions could have not come at a worse point in time!

In view of the critics, the Commission proposed the – pairing of the publication of its ETS proposal with the creation of a Social Climate Fund, with the goal to cushion the blow of higher prices for vulnerable. Yet it has been somewhat criticised for not having been ambitious enough and for not considering a large part of the population that already struggles to pay their bills without falling under the targeted categories.

While the European Commission initially proposed to allocate €72 billion to the Fund, under pressure from the frugally-minded European Member States, the Council opted to shrink the Social Climate Fund to €59 billion, while for the European Parliament mandate was clear: “Their price for an ETS2 was a bigger Social Climate Fund!” asking EU capitals to contribute extra money from their national budgets.  

The final deal reached between the co-legislators propose to dot the Fund with €86.7 billion running from 2026 until 2032, which will support vulnerable households, micro-enterprises and transport users. It will be up to national governments to disburse the funding in a way that supports investment in energy efficiency in buildings and improves access to low-emission transport.

The Social Climate Fund is set to run from 2027-2032, but it may start a year early in order to help consumers prepare for price rises, using revenues from the auctioning of 50 million carbon allowances in 2026. Afterwards, it will be funded by up to 65 billion euros in revenues generated from the expanded carbon market and an additional 25% from national governments. If carbon prices hit 45 euros a tonne, extra emissions permits will be released into the market to temper prices.

In addition, co-legislators have extended the introduction of this ETS2 for transport and buildings by a year – by 2027 – compared to the initial Commission’s proposal. Most importantly, they introduced an “emergency break” by which it could be further postponed until 2028 to protect the citizens if energy prices (continue to be) exceptionally high.

The ENPOR consortium welcomes the EU’s efforts to provide more financial aid to help consumers embark on a green transition, in hopes that Member States will pay particular attention to allocating the new Fund to vulnerable households in energy poverty. It goes without saying that the amount offered would only account for a fraction of the support needed. Since the climate transition should be a fair one, extra support is required for the EU’s most vulnerable citizens.

EU Policy makers have yet to rubber-stamp the ETS2 deal, which should happen early in 2023.

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