The Emissions Trading System (ETS) is at the core of the European Union’s climate policy, covering 45 per cent of the Union’s emissions reductions in the power sector, its energy-intensive industries and aviation. The principle underlying ETS is ‘polluters pay’ which means that this mechanism puts a price on carbon and allow polluters to trade carbon allowances.
World Wide Fund for Nature (WWF) reports that despite its intent, the ETS has not been very successful in making polluters pay. Mainly because carbon prices have remained too low and the system has been plagued by design flaws like ‘free’ allowances for some industrial sectors, putting costs of pollution onto others. As a result, the emissions have not decreased sufficiently and the revenues from ETS have not been as high as they could be.
Recently the EU proposed Emissions Trading System for the buildings and transport sectors (ETS 2) too. According to the European non-governmental organisations, the proposal lacks clear regulations on socially acceptable compensation and the planned ETS 2 can only serve as a complementary climate action instrument.
CEENERGYNEWS talked to Klaus Röhrig, Climate and Energy Policy Coordinator at Climate Action Network (CAN) Europe, one of the organisations that commissioned a study on the ETS 2. He answered our questions on socially just carbon pricing, the effectiveness of ETS in emissions reduction and the impact of ETS 2 on the CEE region.
Starting off from the paradigm-shifting Russia-Ukraine war, Mr Röhrig tells CEENRGYNEWS that the war has implications on the EU carbon pricing as well.
“The Russian aggression shows (once more) the need for Europe to accelerate the shift away from fossil fuel dependency and towards energy independence fully relying on renewables,” he begins. “The Fit For 55 package, including those files that strengthen carbon pricing, are a central part of the mid and long-term solution to this crisis. At the same time, the expected impacts on inflation, consumer prices and energy bills also raise the need for a holistic and socially just framework and the need to put sufficient support mechanisms in place that can manage and accelerate the transition towards fossil-free ways of consumption, especially for low-income households.”
According to him, the absence of carbon pricing which is “the current status quo in most sectors – is per se socially unjust”, adding that climate crisis and all its associated impacts “entail massive societal costs, ranging from climate change-related crop losses or damages to buildings and infrastructure to public health costs.”
“The German environmental agency estimates that these social costs of one tonne of carbon are around 180 euros, far above the recent ETS prices. In the absence of carbon pricing, these costs of inaction are ultimately paid by the taxpayer, while the damages are often borne by people and communities most vulnerable to the impacts of climate change”, Mr Röhrig emphasises.
On the other hand, he believes that carbon pricing which is designed in a socially just manner can address these problems. The sufficiently high price on carbon, he points out, “needs to be accompanied by measures that protect low-income households and vulnerable communities. There is a real risk of exacerbating energy and mobility poverty, especially if there are not enough affordable fossil-free alternatives available.”
“Introducing strong carbon pricing, therefore, needs to go hand in hand with a […] dedicated strategy to support the transition of low-income households towards clean and fossil-free consumption, heating and mobility.”
He also underscores that shifting consumption patterns of the richer segments of society and those who can pay more, should contribute more to mitigating the climate crisis.
“So far, industry, particularly large polluters, have been mainly shielded from paying the carbon price, although being major contributors to EU total emissions. For the transition to be fair, also this untargeted exception for big polluters needs to end”, Mr Röhrig says.
When it comes to equitable distribution of benefits from carbon pricing across all Member States, for Mr Röhrig a broader policy toolbox is necessary that goes beyond carbon pricing.
“It is important that nationally binding targets under the Effort Sharing Regulation (ESR) are maintained and further increased. The current approach to increase the ESR targets alone however is unlikely to put SEE and CEE member states on a cost-efficient pathway to achieve climate neutrality by 2050. A broader policy toolbox including carbon pricing could therefore be an effective way to incentivise additional emission reductions in CEE and SEE.”
Furthermore, revenues that carbon pricing can generate should be used “to accelerate the transition and buffer the social impacts on the most vulnerable, especially if the architecture includes a solidarity component that also allows for the distribution of revenues from richer to the lower-income Member States,” Mr Röhrig underlines.
About the distributional impacts of ETS 2 specifically, he notes that in combination with the Social Climate Funds, it can have “positive impacts on shifting revenues from higher-income member states to countries where carbon prices even at relatively low price levels will have higher social impacts with Bulgaria, Romania and Greece expected to see the highest per capita benefits.”
For this to work, particularly for low-income member states, Mr Röhrig says that the size of the Social Climate Fund should be increased.
“At the member state level, the distributional impacts are more opaque, also given the diverse administrative and fiscal structures across the EU,” he concludes. “This means that there is a need for much better governance, diligent reporting and scrutiny of social climate funds. Experience with the existing ETS shows that leaving too much discretion to member states on revenue use can lead to a large amount of lost investments for the transition or even investments that go against the objectives of the European Green Deal.”