A Fair and Solidarity-based EU Emissions Trading System for Buildings and Road Transport
Benjamin Görlach, Michael Jakob, Katharina Umpfenbach, Mirjam Kosch, Michael Pahle, Théo Konc, Nils aus dem Moore, Johannes Brehm, Simon Feindt, Fabian Pause, Jana Nysten, Jan Abrell (2022): A Fair and Solidarity-based EU Emissions Trading System for Buildings and Road Transport. Kopernikus-Projekt Ariadne, Potsdam.
In this Ariadne publication, experts from Ecologic Institute, Potsdam Institute for Climate Impact Research, RWI – Leibniz Institute for Economic Research, Mercator Research Institute on Global Commons and Climate Change, Stiftung Umweltenergierecht, ZEW – Leibniz Centre for European Economic Research and IER Stuttgart analyzed various options for the relief and level of the CO2 price – and identified advantages and disadvantages as well as implementation requirements of different design options. The focus is on two key political points of contention, where scientific findings can prevent an impending hardening of the position and thus promote a consensus that is conducive to climate protection.
An initial key point of contention is whether the Social Climate Fund will become a new supporting transfer mechanism of European climate policy with a large financial scope – or rather a European supplement to social policy relief mechanisms in the individual member states. An alternative to the SCF would be a so-called "Social Climate Mechanism". This would set certain EU-wide standards for fair compensation, but would distribute the revenues from the sale of certificates directly to the member states instead of passing them through the EU budget. In addition, the financial size of the fund could be smaller if targeted to compensate households that have low incomes and high energy expenditures. Around 10% of the proceeds from the auctioning of allowances would be sufficient to compensate all energy-intensive consumers with incomes below the EU-wide average for their additional energy costs. In contrast, more than 30% of the revenues would have to be used if all consumers with these incomes were compensated accordingly, regardless of their energy costs.
A second key point of contention is whether the need for relief can also be reduced by capping the price of ETS2 allowances – or by requiring households, as opposed to businesses, to pay a price for CO2 at a later date. Such a cap or limitation would reduce the direct financial burden on households and thus reduce the size of the Social Climate Fund. At the same time, however, supplementary measures such as technological standards or subsidies would have to be implemented on a large scale. The effective costs for private consumers would thus increase significantly because the flexibility to reduce emissions where it is cheapest would be lacking. However, an uncapped allowance price would have the effect that some EU member states would avoid much more than they would actually have to under EU burden sharing (ESR) to ensure solidarity in climate protection. To ensure solidarity, countries with over achievement would have to be able to sell them to more prosperous countries with more ambitious targets under the ESR crediting system. This trading between member states – regardless of the ETS2 price – is desirable from an economic point of view: almost all member states achieve substantial welfare gains of up to €400 per person as a result. So far, however, this trade between member states has been sluggish and politically over-formed, making reforms to increase the liquidity and transparency of the market urgently needed.
The ETS2 is a key lever for achieving Europe's climate goals. The options for an equitable design of emissions trading outlined in this Ariadne Report could help build political consensus for this instrument.
The extension of emissions trading to the buildings and transport sector (ETS2) is a core element of the European Commission's Fit for 55 package, which is highly controversial politically. The aim of ETS2 is to provide incentives for climate-friendly investments and innovations by means of a technology-neutral CO2 price. By capping emissions, it also sets a clear path to climate neutrality. Parts of the revenue from the sale of certificates are also to be used to provide financial relief for households via a Social Climate Fund (SCF). But exactly how the relief should be provided and how high the CO2 price should be is the subject of controversial debate. At the beginning of June, the EU Parliament drew up an alternative proposal that differs substantially from the Commission's proposal on these points. Finding a consensus seems difficult – and failing to do so would severely weaken the Fit-for-55 package at a crucial point.