Who will pay for Europe’s bold emissions plan?
Facts, comments and scenarios in an in-depth study by the Financial Times
Earlier this year, the German government discreetly launched a new carbon pricing system that could revolutionize who pays the cost of pollution in Europe.
Since January, the EU's largest economy has introduced a de facto tax of € 25 per tonne of carbon on petrol, diesel, fuel oil and gas to raise the cost of dirty energy and incentivize greener ways of living. This means that millions of Germans will pay more at gas pumps and in their heating bills.
Germany's experiment, known as the National Emissions Trading Scheme, is engaging consumers to help the country meet its aggressive emissions reduction targets.
The German carbon pricing model could soon be extended to all of Europe. Brussels is using it as a model for its plans to extend the emissions trading scheme – its carbon price market – to bands of the economy this summer as part of its goal of becoming the world's first net-zero carbon-neutral continent. world by 2050 – writes the FT .
Climate scientists and economists largely agree that putting a prohibitive price on CO2 – using a market-driven system or more crude carbon taxes – is an indispensable way to encourage consumers and businesses to switch to greener ways of life.
Frans Timmermans, EU Deputy Commissioner for the Green Deal, hailed the European carbon price instrument as a "cornerstone" of the EU environmental agenda "because it has been so successful".
"It put a price on carbon," he said. "It's a huge incentive tool and it's clear we need to expand it."
But even before the new scheme is introduced, it is generating a storm of opposition. For a growing number of EU governments and some green activists, Brussels' ambitions risk plunging Europe's poorest people into energy poverty, making them bear the brunt of the group's race to zero. They fear that without an accompanying system of massive state subsidies and financial compensation, carbon pricing will be a regressive tool that will punish millions of Europe's poorest households living in rented or public housing and who are stuck with petrol cars. – ultimately it will serve to undermine public support for the EU's ambitious climate goals.
European politicians are well aware of the French experience, when President Emmanuel Macron's 2018 plan to raise taxes on gasoline sparked the gilets jaunes protest movement.
The political backlash has been so severe that there is still no guarantee that Brussels will move forward with the plan.
“Right now the people directly affected by the carbon price in Europe are a few thousand companies rather than millions of people,” says Pascal Canfin, a French MP and head of the European Parliament's environment committee. He warns that Brussels will have to offer ways to ease the blow to consumers facing higher electricity bills, or risk "creating a major economic shock for poorer households."
PAY THE TRANSITION
At the heart of the EU's drive to reduce emissions is the future of the European ETS, which covers sectors that account for around 40% of EU emissions.
In July, the European Commission will propose to expand the ETS to consumer-facing sectors, such as car manufacturers and buildings – a reform that would mirror the German model and mark a radical shift in market-driven carbon pricing that is observed by countries. rich people around the world.
The social consequences of the expansion of the ETS mean that the forthcoming reform is already proving to be one of the most sensitive and contested parts of the EU's radical decarbonisation agenda. Claude Turmes, Luxembourg's environment minister, says his government will oppose any extension to cover cars and buildings because "it risks penalizing low-income parts of the population."
At a summit in Brussels in May, EU leaders from poorer eastern countries also warned that their citizens – many of whom cannot easily afford to ditch their diesel cars or change the heating system in rented accommodation – will suffer the negative effects.
European governments have reasons to fear a social backlash. The French gilets jaunes have highlighted the fragile popular consensus that often underlies radical emissions targets – particularly if they are seen as disproportionately targeting low- and middle-income households even in relatively wealthier economies.
"We need to make the [green transition] so that all income levels can maintain their lifestyle," said Mark Rutte, the Dutch prime minister, after the May summit in Brussels. “If we increase the costs due to the plans drawn up in Brussels or The Hague, we will lose support for what we are doing. It is crucial that we take the company with us ”.
The debate on the future of the ETS hits the key issues at the heart of the European Green Agenda: who will pay for the transition and how?
Established in 2005, the European ETS created a cap-and-trade carbon market to incentivize large power companies and large industrial polluters to reduce their carbon footprint by forcing them to buy credits to cover their emissions.
Companies that pollute more than their allocated quota have to buy more credits, and less if their emissions are falling. Over the past year, the cost of pollution determined by the ETS has skyrocketed by 60 per cent – hitting a record high of more than € 53 per tonne of carbon in the past month, as investors bet the EU will catch up. its goal of 2050 net zero.
Brussels, which effectively controls the supply of credits by setting allocations for sectors and an overall emissions ceiling, estimates that the price will have to reach 60 euros per ton to reach the revised target of a 55% cut in CO2 emissions by 2030, based on 1990 levels.
If the reform were to go ahead, it would transform the ETS from an esoteric market tool designed to put a prohibitive price on dirty energy like coal, to a system that will set a de facto carbon price on companies that account for nearly three-quarters of EU emissions.
A senior EU official says the final decision on whether to push the expansion forward will be made "at the last minute" given the potential extent of opposition from member states. Brussels is planning to minimize the initial disturbance of the ETS by establishing a smaller scheme that only covers cars and buildings, Commission President Ursula von der Leyen said this month. A crucial element will be the level at which the carbon price is set in the parallel system, with an official saying it is likely to be comfortably below the current ETS price.
Experience from Germany suggests that car manufacturers and construction companies will pass even modest CO2 costs to consumers. The carbon price of 25 euros in Germany will increase the cost of a liter of diesel by 0.08 euros, gasoline by 0.07 euros and heating oil consumption of 2,000 liters per year will be taxed at 159 euros, according to the Federation of German Consumer Organizations (VZBV).
On average, the system will mean that a family of four with a petrol-powered car and gas heating will pay € 204 more per year in 2021, to reach € 451 in 2025, when the carbon price rises to € 55. per ton.
Thomas Bobinger, head of EU policy at the VZBV, says the system is regressive as poorer households are often "trapped in fossil fuel-based businesses and have to bear the costs of carbon". He adds: “Those with the lowest incomes don't necessarily have the money to invest in energy efficiency. They cannot simply reduce their consumption by choosing not to drive the car or turn on the washing machine. Tenants cannot change their heating systems or insulate their walls ”.
There have been few signs of a backlash in Germany, though Bobinger says it's too early to tell if the system is a success. "It's been five months since pricing was introduced and people usually get their heating bills later in the year."
EXPLICIT COSTS
In Brussels, the cap-and-trade system was seen as a more attractive alternative to imposing direct carbon taxes, which have been resisted by voters who fear that they will drive up the cost of living.
The rise in the cost of carbon credits over the past year has also been seen as a vote of confidence in the ETS, as investors have grabbed the odds, betting their value will skyrocket if the system expands to cover multiple sectors. Before 2020, the price of ETS credits rarely exceeded € 30 per ton.
Other large economies are trying to follow Europe's example. Earlier this year, China established the largest carbon market in the world accounting for around 30% of its total emissions. A handful of US states, including California, also have cap-and-trade schemes, while the post-Brexit UK launched its own ETS in May. The UK price has risen above that of the EU to more than £ 50 per tonne.
“We are reaching the point where the costs of decarbonisation cannot be hidden,” says Michael Pollitt, professor of business administration at Cambridge University. "The reason many are concerned about the ETS is that it makes this cost explicit – it's a direct price on pollution," says Pollitt, who advocates expanding the system as a way to "massively help increase the credibility of the net zero policy ".
The Commission's ETS reform will include a number of significant elements, including the phasing out of free allowances for sectors such as aviation, which have been a feature of the system for decades. Brussels will also include maritime and transport industries in the ETS for the first time – elements that are likely to help drive up the cost of pollution in the short term.
The ETS will play a central role in the EU's multiple strategy to drastically reduce emissions. The Brussels Green Deal philosophy combines the use of tools such as the carbon market with tougher legislative tools, such as the imposition of binding standards on car emissions, higher targets for renewable energy, and schemes to encourage investment of the private sector in green technologies.
A senior EU official describes the use of carbon pricing "as a minimum safety net" for CO2 taxation "but not a panacea" in the quest to decarbonise the European economy.
USE ETS REVENUES
Environmental activists have warned against excessive extension of carbon pricing and against the fact that the ETS carries the burden of meeting emission targets. They fear that the systemic changes needed to phase out fossil fuels, expand the availability of electric vehicles and decarbonise heavy industry can only be achieved fairly through regulation.
"The EU Green Deal can be an example to the world of how to make a quick and just transition, but only if it uses the right tools," says Sofie Defour, head of climate at the clean transport campaign group Transport & Environment. "The heavy lifting has to come from things like emission-free cars, fast electrification and building a world-class charging network."
A Cambridge Econometrics study estimates that extending carbon pricing to cars and homes would bring ETS quotas to € 180 per ton by 2030. Modeling of the report says that the cost of gas heating for French households would almost double in the year. next decade, and would rise 188% for coal-fired homes in Poland.
In such a scenario, the report warns that the blow to the EU economy can only be mitigated if all ETS revenues are reused to compensate vulnerable families and finance investments in cleaner technologies.
Yet Brussels has limited powers to force its governments to provide mass subsidies or tax breaks for citizens who have to pay the price. ETS revenues are spread across the 27 EU governments that receive the bulk of the money from the system, with smaller funds designed to help low-income member states finance renewable technologies.
Europe's member states are fiercely protective of the money they recover and have already rejected Brussels plan to use part of the ETS proceeds to repay hundreds of billions of EU common debt issued to finance Covid-19 recovery. . “There are a lot of customers for ETS money and almost everyone will end up with less than what they want,” says an EU official.
For Bobinger of the German consumer federation, Europe's move towards mass carbon pricing cannot happen without a serious discussion in Brussels and European capitals on how to offer direct compensation to the most affected households.
“Welfare systems and social support mechanisms vary a lot in Europe. Unlike the US, the EU cannot distribute direct stimulus allowances. It is unfair to say that individuals can solve climate change by changing their behavior, ”says Bobinger.
Pollitt of Cambridge University warns that although the poorest in society can be protected by state intervention, the wealthiest families will eventually be forced to pay or change their habits.
“Hitting net zero in a 30-year period is a historic transition and politicians need to stop pretending it can be done for free,” he says. "Governments may try to exempt the poorest from all costs, but the middle class will have to pay."
(Extract from the Epr press review)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/europa-emissioni-piano-chi-paga/ on Sun, 06 Jun 2021 06:17:39 +0000.