A Fair and Solidarity-based EU Emissions Trading System for Buildings and Road Transport - Ariadne Report
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Ariadne Report A Fair and Solidarity-based EU Emissions Trading System for Buildings and Road Transport
Authors
» Benjamin Görlach » Dr. Michael Jakob » Katharina Umpfenbach
Ecologic Institut Ecologic Institut Ecologic Institut
» Dr. Mirjam Kosch » Dr. Michael Pahle » Dr.Théo Konc
Potsdam-Institut für Potsdam-Institut für Potsdam-Institut für
Klimafolgenforschung Klimafolgenforschung Klimafolgenforschung
» Johannes Brehm » Simon Feindt
» Dr. Nils aus dem Moore RWI - Leibniz-Institut für Mercator Research Institute on
RWI - Leibniz-Institut für Wirtschaftsforschung
Wirtschaftsforschung Global Commons and Climate
Change
» Fabian Pause
Stiftung Umweltenergierecht » Jana Nysten » Dr. Jan Abrell
Stiftung Umweltenergierecht ZEW - Leibniz-Zentrum für
Europäische Wirtschaftsforschung
Cite this paper:
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.
Corresponding Author: Dr. Michael Pahle, michael.pahle@pik-potsdam.de
This Ariadne analysis was prepared by the above-mentioned authors of the Ariadne
consortium. It does not necessarily reflect the opinion of the entire Ariadne consortium
or the funding agency. The content of the Ariadne publications is produced in the pro-
ject independently of the Federal Ministry of Education and Research.
Published by Photo Credits
Kopernikus-Projekt Ariadne Titel: Antoine Schibler / Unsplash
Potsdam-Institut für Klimafolgen-
forschung (PIK)
Telegrafenberg A 31
14473 Potsdam
June 2022
TABLE OF CONTENTS
Executive Summary 1
1. Introduction 5
2. Institutional options to ensure solidarity and social fairness:
Social Climate Funds and alternatives 7
Different paths to the same goal 7
Description and analysis of different options 8
Step 1: Comparing Option I (“Cheque from Brussels”)
with Option IV (“No EU interference”) 8
Step 2: Comparing Option II (Social Climate Fund)
with Option III (Social Climate Mechanism) 10
Discussion and recommendations 11
3. Distributional implications between member states (solidarity) 12
Considering the interaction between the ETS2 and the ESR is
essential for the robustness of the social compensation mechanism 12
Scenario analysis to explore the effects of AEA trade and ETS2
price levels 13
Summary of results 14
Scenario 1: No AEA trade & low ETS2 price 14
Scenario 2: High ETS2 price with AEA trade 16
Uncertainties might lead to an unstable system and need to
be addressed 16
4. Distributional implications within member states (social fairness) 17
One price, but very different financial burdens 17
Description and analysis of scenarios 18
Discussion and recommendations 20
References 22
Appendix to Section 2 23
EXECUTIVE SUMMARY
1. The new emissions trading system and regulations at EU and member-
for buildings and road transport – state level. This study fills this gap
the so-called ETS2 – proposed by for three particularly important
the European Commission in the Fit choices that may have far-reaching
for 55 package is key for decarboni- consequences for the overall policy
sing these two sectors. But a uni- package:
form EU-wide carbon price has im-
portant distributional implications – 3. The first design choice is the institu-
both between EU member states tional structure and general gover-
and within them. Managing these nance level of the mechanism to
implications in a way that ensures manage the distributional implicati-
solidarity and fairness is of utmost ons. While the SCF seems generally
importance to providing the ETS2 capable of performing its designa-
and its price signal with the neces- ted function, there are concerns sur-
sary political robustness and endu- rounding whether the SCF should
ring credibility. be established at EU level or at the
member-state level. Against this
2. To that end, the Commission has backdrop, this report compares the
proposed the creation of a Social SCF with three other design options
Climate Fund (SCF).1 While this pro- that differ in terms of how they are
posal builds on evidence gathered situated between national and su-
by the Commission for related ana- pranational levels.
lysis2, no dedicated impact assess-
ment has yet been conducted. Other 4. The second design choice relates to
studies have analysed some of the the interaction between the ETS2
design aspects – especially the dis- and the Effort Sharing Regulation
tributional effects of carbon pricing (ESR). In general, the ETS2 can shift
on households – but key design the distribution of emissions reduc-
choices have not yet been systema- tions away from agreed-upon ESR
tically explored. In particular there targets, with consequent welfare ef-
needs to be an understanding of: fects.3 In order to maintain a fair ef-
(1) the advantages and disadvanta- fort-sharing between EU member
ges of different design options, and states, it is crucially important to
(2) interactions with other policies manage the distribution and flow of
1 On 8 June 2022, the European Parliament voted on the SFC proposal as well as proposed amendments. The EP rejected the report on the revi-
sion of the EU ETS and referred it back to the ENVI committee. The final vote on the SCF was adjourned until agreement on the ETS review has
been achieved. See https://www.europarl.europa.eu/news/en/press-room/20220603IPR32130/fit-for-55-environment-committee-to-work-on-
way-forward-on-carbon-pricing-laws
2 See the section titled “Collection and use of expertise” in the SCF proposal (COM(2021) 568 final).
3 The reason for this possible divergence between the ETS2 and the ESR is the interactive, and not yet fully specified, overlap of a bottom-up and
a top-down system: In the “bottom-up” ETS2 system, companies throughout the EU trade allowances for the emission of CO2. The resulting allo-
cation of ETS2 allowances is therefore an emergent market outcome, determined by company-specific abatement costs. In contrast, the “top-
down” ESR specifies an allocation of abatement burdens between member states (defined via the “Annual Emission Allocation”, AEA) and provi-
1
des for the trading of AEA allowances between the member states.
revenues resulting from the trade of Figure ES1: Institutional design options for the social balancing of a new ETS2
ESR certificates (annual emission al-
locations, AEAs) and ETS2 certifi-
cates. This report uses quantitative
modelling to analyse how welfare
would change if AEA trade was limi-
ted, and/or the ETS2 price was rela-
tively high.
5. The third design choice concerns
the financial volume of the SCF (or
of an alternative social transfer me-
chanism): how large does it need to
be, in terms of the share of total
auction revenues, to ensure fair (between member states) and the 9. Based on eight guiding questions4,
compensation for households idea of the welfare state (within we describe the SCF proposal in
across the EU, given varying criteria each member state). Furthermore, terms of its institutional characteri-
for social fairness? This is important the principle of subsidiarity deman- stics and compare it with the three
because there is a trade-off between ds that the EU only acts if and inso- alternative approaches depicted in
using revenues for social compensa- far as the objectives of the proposed Figure ES1. For the two “corner so-
tion on the one hand, or financing action cannot be sufficiently achie- lutions”, our analysis points to se-
green investments and infrastruc- ved by the member states. vere deficiencies, both conceptual
ture on the other. Furthermore, dif- and practical, implying that they do
ferent forms of compensation entail 8. Given this tension, it is worth evalu- not represent feasible solutions.
different administrative require- ating how the objective of "leaving Looking at these options is nevert-
ments and specific challenges. This no one behind" of the current SCF heless useful since proposals in the-
report discusses these issues in proposal can be achieved best by se directions are on the table. The
light of the SCF spending criteria, comparing four design options, second step of the analysis then
specifically with a view to possible each of which situates governance contrasts the Commission’s propo-
adjustments that would make com- of the respective program at a diffe- sal for a Social Climate Fund with
pensation more targeted. rent stage along the cooperation - an alternative option: a “Social Cli-
subsidiarity spectrum. Figure ES1 il- mate Mechanism” (SCM). A central
DESIGN CHOICE 1: INSTITUTIONAL lustrates these four options, ran- idea of the latter approach is that
STRUCTURE AND GOVERNANCE LEVEL ging from extreme cooperation the goal of social balancing can be
("Cheque from Brussels") to extre- achieved through clearly-defined ru-
6. The SCF, as proposed by the Euro- me subsidiarity ("No EU interfer- les and procedures, but without re-
pean Commission, is only one out of ence"), with two moderate options course to the EU budget – thus
a number of different design opti- in between. avoiding some political, legal and
ons for achieving the goal of a soci- administrative hurdles.
ally balanced implementation of the
ETS2 – and it may not be the best
one. Alternatives are conceivable Figure ES2: Overview of interactions between ESR and ETS2
with regard to (1) who should be eli- existing uncertainties in the regulation outcome, and possible impacts on cost
effectiveness and distributional implications of the Fit for 55 package.
gible for compensation, (2) who
should be responsible for compen-
sation, and (3) who should control
the spending.
7. The SCF’s goal of preventing exces-
sive burdens from the ETS2 is un-
questionably appropriate and im-
portant. Nevertheless, the proposal
has sparked controversy because
the distributional effects of climate
change touches on very fundamen-
tal and sensitive issues at the heart
of the EU, i.e. the value of solidarity
4 (1) Where do funds originate? (2) Which criteria govern the allocation of resources? (3) Is member-state co-funding required? (4) Where are the
funds held? (5) Who decides on spending? (6) Are the criteria for spending set at the EU level? (7) How is spending controlled and governed?
2
(8) How are funds disbursed?
10. A main result of our analysis is that Figure ES4: High-intensity energy consumers in the EU by income decile
the quality of implementation and
the level of cooperation between the
Commission and member states is
crucial for the performance of both
the SCF and the SCM. Assuming ide-
al implementation and sincere co-
operation between the Commission
and member states, the SCF may be
the better option since it achieves
its targets more reliably. The alter-
native proposal of an SCM is less
ambitious in terms of precision and
stability, but allows for a leaner
structure and a higher degree of
member-state ownership. It is ulti-
mately a matter of policy preference
that tilts the balance towards either
the SCF or the SCM.
DESIGN CHOICE 2: ETS2 AND ESR IN- most all member states (left-hand 13. To increase the political stability of
TERACTION panel of Figure ES3) and thus make the Fit for 55 package, we propose
it more difficult to reach the EU’s to (i) improve AEA trade and (ii) en-
11. The interaction between the ESR emissions target. Second, a higher sure that the relative distribution of
and ETS2 in the Fit for 55 proposal ETS2 price is likely to have an im- ETS2 revenues between member
entails uncertainty in three dimensi- pact on the cost distribution across states is independent of the ETS2
ons: AEA trade may remain limited; member states that is at odds with price, i.e. social transfer mecha-
the ETS2 price is uncertain; and it is the ESR (right-hand panel of Figure nisms need to be scaled accordingly.
unclear how revenue allocation bet- ES3) if social transfer mechanisms
ween member states will respond to are not scaled accordingly. In this DESIGN CHOICE 3: DISTRIBUTIONAL IM-
changing ETS2 prices (Figure ES2). case, (mostly) poorer member PACTS & TRANSFER
states would suffer from higher wel-
12. If not properly accounted for in poli- fare costs whereas (mostly) richer 14. At the EU level, the impact of the
cy design, these uncertainties might member states would benefit from ETS2 would be slightly regressive.
undermine the stability of EU clima- lower welfare costs. Both potentially That is, low-income households
te policy architecture. Our analysis undermine the political acceptability would, on average, spend a higher
brings two main risks to light: First, of the EU’s climate ambition. share of their disposable income to
an absence of AEA trade will increa- keep up their energy consumption.
se the costs of climate policy for al- However, using the revenues from
auctioning permits can make the
ETS2 progressive.
Figure ES3: Changes in welfare per capita – compared to the base case with AEA 15. Using revenues from carbon pricing
trade and a low ETS2 price. Note: For a short description of the model see Box be-
in a way that benefits every EU citi-
low; individual scenarios are described in the subsequent sections.
zen in an identical manner (e.g. by
direct transfers, tax reductions or
infrastructure investments) could
provide benefits to low-income hou-
seholds that exceed their additional
energy costs, so that they are better
off with the ETS2.
16. While low-income households would
gain on average, a carbon price
would put high-intensity energy
consumers, for whom energy expen-
diture constitutes a large share of
spending, at risk of energy poverty
3
(Figure ES4). Households in Bulga- Figure ES5: Share of auction revenues required to compensate (a) all high-inten-
ria, Hungary, Poland and Romania sity consumers, and (b) all consumers, for their additional energy costs due to a
would be at greatest risk of experi- carbon price. Source: own elaboration.
encing energy poverty.
17. Targeted measures can prevent
energy poverty for low-income hou-
seholds. Transfers amounting to
slightly more than 10% of auction
revenues would be sufficient to
compensate all high-intensity ener-
gy consumers in the lower half of
the income distribution for their ad-
ditional energy costs (Figure ES5).
However, transfer payments to all
households in this income segment
would require more than 30% of
carbon-pricing revenues.
18. Relieving households by lowering
energy prices does not make sense
because it also weakens the incenti-
ve to reduce emissions. More sensi-
ble are measures that especially
enable vulnerable groups to adjust
to higher energy prices, since these
are effective from an environmental
as well as social perspective. This in-
cludes expansion of public transport
or targeted support for heat pumps
in low-income households. Starting
to implement such measures before
the ETS2 enters into force can help
to cushion social hardships.
4
1. INTRODUCTION
The new emissions trading system for tion (i.e. a higher relative burden on low-
buildings and road transport – the so- income segments of society). Correspon-
called ETS2 – proposed as part of the Fit dingly, member states with a relatively
for 55 package is key for decarbonising high share of low-income households are
these two sectors. It will oblige fuel sup- disproportionally affected by a uniform
pliers to obtain emission allowances for carbon price – especially if they do not
the greenhouse gas (GHG) content of the have the financial means or institutional
fuels they supply to customers in those capacity to compensate such households
sectors. The ETS2 thus sets up a techno- through social policy and transfers.
logy-neutral carbon price that provides
incentives to decarbonise operations and This suggests the need for a mechanism
foster investment and innovation to- to balance the distributional effects of
wards the EU goal of GHG neutrality by the ETS2 in a way that ensures social
2050.5 fairness within EU member states, and
solidarity between them. Such a mecha-
However, a uniform EU-wide carbon nism will make the ETS more acceptable
price will have distributional implications upon its introduction, more robust in
at the household level, both between light of changing energy prices – and
and within EU member states (see Figu- thereby more likely to politically durable,
re 1): Low-income households tend to and deliver a stringent and credible car-
spend a higher proportion of their dispo- bon price. The use and (re)distribution of
sable income on energy consumption. revenues from auctioning ETS certifi-
This raises the issue of social fairness cates between and within member
and how to avoid a regressive effect of states will be key to achieving this. Cor-
the carbon price on the income distribu- respondingly, the rules for the distributi-
Figure 1: Distributional effects of a carbon price between and within countries (without revenue redistribution)
Source: Frederikkson & Zachmann (2021)
5 Furthermore, the ETS2 would represent an important milestone on the road to a uniform CO2 price within Europe, which should foster interna-
5 tional cooperation in the form of a global carbon pricing regime (Edenhofer et al. 2021)
on of allowances between member state level. Against this backdrop, this
states, and the criteria for spending the report compares the SCF with three
resulting revenues, are the central policy other design options that differ in terms
levers for which design options are being of how they are situated between natio-
discussed. nal and supranational levels.
The Commission has proposed to institu- The second design choice relates to the
tionalize these levers through the creati- interaction between the ETS2 and the Ef-
on of a dedicated Social Climate Fund fort Sharing Regulation (ESR), which
(SCF).6 Its core features are: (1) A total fi- establishes binding annual emissions
nancial envelope for the 2025–2032 pe- targets for EU member states related to
riod of 72.2 billion € in current prices – i.a. emissions from road transport and
amounting to 25% of expected ETS reve- buildings.8 If the ETS2 allowance price is
nues – to be financed through the EU’s relatively high, member states with rela-
Multiannual Financial Framework (MFF). tively unambitious ESR targets risk
This entails a “frontloading year” to en- overshooting them. To maintain the dis-
sure a smooth transition to the ETS2. (2) tribution of efforts as agreed upon in the
A formula for the maximum financial al- ESR, it is crucial to manage the distribu-
location from the SCF to each member tion and flow of revenues resulting from
state. (3) Social Climate Plans (SCPs), to the trade of annual emission allocations
be assessed by the Commission, in which (AEAs) (which determines the number
member states articulate the measures and distribution of ESR certificates) and
to be financed through the SCF, their ex- ETS2 certificates among member states.
pected costs, milestones and targets. If This report therefore analyses how wel-
approved, the SCF can finance up to 50% fare would change if – in contrast to the
of the total SCP costs, with the remain- European Commission’s assessment as-
der coming from member states’ natio- sumptions – AEA trade was limited, an-
nal budgets. d/or the ETS2 price were relatively high.
On the basis of quantitative modelling
While the proposal builds on evidence results, we discuss various options for
gathered by the Commission for related how ETS2 allocation and market rules
analysis7, no dedicated impact assess- could be adjusted to increase the robust-
ment of the SCF has yet been conducted. ness of effort sharing between member
Other studies have analysed some de- states in the face of an uncertain ETS2–
sign aspects – most notably the distribu- ESR interaction.
tional effects of carbon pricing on house-
holds – but key design choices have yet The third design choice concerns the is-
to be systematically explored. In particu- sue of how large a share of total auction
lar there needs to be an understanding revenues the SCF (or an alternative me-
of: (1) the advantages and disadvantages chanism) needs to be to ensure adequa-
of different design options, and (2) in- te compensation for households across
teractions with other policies and regula- the EU, given varying criteria for social
tions at the EU and member-state level. fairness. This is important because there
This study seeks to address three design is a trade-off between using revenues for
choices which may have far-reaching compensation on the one hand, or for fi-
consequences for the overall policy nancing green investments and infra-
package: structure on the other. Furthermore, al-
ternative forms of compensation entail
The first design choice concerns the insti- different administrative requirements
tutional structure and general gover- and specific challenges. This report dis-
nance level of the mechanism to manage cusses these issues in light of the SCF
the distributional implications of ETS2. spending criteria, specifically with a view
While the SCF seems generally capable to possible adjustments that would
of performing this function, there are make compensation more targeted.
concerns whether redistribution should
be handled at the EU level (as foreseen
in the SCF proposal) or at the member-
6 https://ec.europa.eu/clima/eu-action/european-green-deal/delivering-european-green-deal/social-climate-fund_en
7 See the section titled “Collection and use of expertise” in the SCF proposal (COM(2021) 568 final).
6 8 https://ec.europa.eu/clima/eu-action/effort-sharing-member-states-emission-targets_en
2. INSTITUTIONAL OPTIONS
TO ENSURE SOLIDARITY
AND SOCIAL FAIRNESS
SOCIAL CLIMATE FUND AND
ALTERNATIVES
Authors: N. aus dem Moore, B. Görlach, F. Pause, J. Nysten, J. Brehm
The SCF, as proposed by the European Different paths to the same goal
Commission, is only one of several diffe-
rent design options for achieving the There is a broad consensus that climate
goal of a socially balanced implementati- policy ought to be socially balanced; as
on of the ETS2 – and it may not be the Frans Timmermans observed, “either
best one. This section describes the SCF this will be a just transition – or there
proposal in terms of its institutional cha- will be just no transition”9. But the con-
racteristics and compares it to three al- crete decisions on who should be eligible
ternative approaches. Two of these mark for compensation, who should be re-
the theoretical extremes along a spec- sponsible for compensation and who
trum of conceivable options. The third is should control the spending remain con-
a proposed Social Climate Mechanism troversial. With its proposal for an SCF,
(SCM) – a moderate and viable alternati- the EU Commission has tabled its idea
ve to the SCF. for a governance structure dedicated to
this purpose. This proposal has attracted
both praise and criticism, as it touches
on a fundamental tension between basic
values and principles of the EU:
▶ The EU relies on solidarity between
member states, as stipulated in Ar-
Figure 2: Institutional design options for the social balancing of a new ETS2
ticle 2 of the Treaty on European
Union (TEU), and within each mem-
ber state, the idea of the welfare
state may encompass the promoti-
on of social protection and inclusion.
▶ At the level of regulatory interventi-
on and implementation, Article 5 of
the TEU specifies the principle of
subsidiarity, stipulating that the EU
shall only act within its non-exclusi-
ve competences if and insofar as the
7 9 Remark by Executive Vice-President Frans Timmermans at the Informal Environment Council on Oct. 1, 2020.objectives of the proposed action of the latter approach is that the METHODOLOGY
cannot be sufficiently achieved by goal of social balancing can be The analysis compares institutions
the Emember states. However, un- achieved through clearly defined ru- based on considerations in law, poli-
der Article 4 (3) of the TEU, the EU les and procedures without recourse tical science and economics. To struc-
and member states shall work to- to the EU budget – thus avoiding ture the analysis and make it trans-
gether in sincere cooperation to some political, legal and administra- parent, a unified framework was
achieve the goals of the Union. tive hurdles. constructed around the following
eight guiding questions:
Depending on the desired balance bet- Step 1: Comparing Option I (“Cheque 1. Where do funds originate?
ween subsidiarity and cooperation, go- from Brussels”) with Option IV (“No EU 2. Which criteria govern the allocati-
vernance can be concentrated more at interference”) on of resources?
the EU level or at the member-state le- 3. Is member-state co-funding requi-
vel. Correspondingly, Figure 2 illustrates The two corner solutions mark the extre- red?
four possible design options for the soci- mes in terms of assigning responsibility 4. Where are the funds held?
al balancing of the new ETS2, ranging for compensation entirely to Brussels 5. Who decides on spending?
from extreme centralisation (“Cheque compared to keeping it entirely within 6. Are the criteria for spending set
from Brussels”) to extreme subsidiarity the member states.11 In both cases, the at the EU level?
(“No EU interference”), with two modera- revenue from ETS2 initially accrues at 7. How is spending controlled and
te options in between. the member-state level; in Option I, the- governed?
se revenues would then be entirely 8. How are funds disbursed?
Description and analysis of different transferred to the EU budget, while in
options Option II they would remain entirely at
the national level. These two options ine-
The analysis of the four options followed vitably imply further differences, for ex- This option promises a number of advan-
eight guiding questions, presented in the ample regarding the decision-making tages: It could help avoid the common
“Methodology” Box.10 It was conducted authority for expenditures, the question “blame game” in which national govern-
in two steps: of binding criteria, and alternative moda- ments credit themselves for success, but
lities of disbursement. blame unpopular elements on Brussels.
1. The first step looks at the two “cor- It would instead create a more positive
ner solutions”, i.e. the extreme posi- The first option, “Cheque from Brussels”, perception of the EU. Furthermore, it
tions. For these, the analysis points is based on the premise that if the EU could reduce the risk of misspending wi-
to severe (conceptual and practical) places a new burden on European hou- thin member states and reduce the
deficiencies, implying that they do seholds, the EU should grant compensa- temptation for member states to use EU
not represent feasible solutions. tion. Compensation from the EU would funds to crowd out domestic social assi-
Looking at these options is nevert- be analogous to solutions in other coun- stance. Finally, by largely eliminating the
heless useful since proposals in the- tries and jurisdictions (e.g. British Colum- member-state dimension in the distribu-
se directions are on the table. bia, Canada or Switzerland)12, where it is tion of funding, it would enable the tar-
granted through a direct transfer pay- geting of funds to the most vulnerable
2. The second step zooms in on the ment to households or even by a cheque groups in Europe – irrespective of the
two more balanced approaches – in in the mail, with the aim of creating ma- country in which they happen to live.
a political, legal or administrative ximum visibility for the compensation There are, however, substantial disad-
sense. This step contrasts the Com- payment. vantages and risks associated with this
mission’s SCF proposal with our al- option:
ternative SCM option. A central idea ▶ Compensation for carbon pricing
becomes part of the EU budget and
the MFF, hence any spending decisi-
I II III IV ons require unanimity. MFF negotia-
Option “Cheque from SCF “No EU
Brussels” SCM interference” tions are already extremely difficult
and often result in delayed agree-
Compensation is Commission pro- Alternative pro-
posal to compen- posal without re- ments; it seems risky to further in-
handled entirely sate for effects of course to the EU Compensation
Description at the EU level the ETS2 through budget, organi- takes place en- crease the complexity of this pro-
(implementation, a dedicated EU zed instead via tirely at mem-
administration ber-state level cess. Moreover, agreeing the criteria
and control) fund member-state
budgets for spending at the EU level would
be subject to the same extensive
Analysis Step 1 Step 2 Step 1 bargaining processes that currently
10 See tables A2.1, A2.2 and A2.3 in the appendix for a detailed overview of the respective design features.
11 Table A2.1 in the Appendix shows how these options play out in light of the eight guiding questions.
8 12 See for instance Haug et al. (2018) and Santikarn et al. (2019).characterize MFF deliberations, limi- The other extreme option – “No EU inter- This approach would also have conside-
ting the flexibility of the use of ference” – embodies the notion that so- rable risks and downsides:
funds. cial policy should be the sole responsibi- ▶ For some member states, at least,
▶ Distributing funds directly from the lity of member states, without any input loosely defined criteria for spending
EU to its citizens would require a from the EU.13 Since the ETS2 creates would be ineffective for directing
very substantial (and capable) Euro- new distributional impacts, according to spending to where it is most nee-
pean bureaucracy for social policy, this line of thought, these impacts can ded. The greater room for manoeu-
which does not yet exist. This pro- and should be addressed by the member vre at the national level could fa-
blem is not trivial: even the authori- states through existing national structu- vour successful rent-seeking by
ties within member states do not res. All EU member states have develo- influential interest groups, or ex-
necessarily have all the relevant in- ped social welfare arrangements and acerbate existing corruption pro-
formation pertaining to all of their structures, but the degree of redistributi- blems, especially if the Commission
citizens (inter alia, current addres- on and social security they achieve differ adopts a loose mode of oversight of
ses and bank accounts). Gathering considerably. This is not necessarily a national spending.
this information would thus likely problem, however; member states opt ▶ Second, if ETS2 revenues flow to-
involve 27 different approaches, for the arrangements that best match ward national compensation or wel-
with complex implications for data the preferences of their electorate, and fare systems, there is a risk that re-
protection and privacy. Building up the EU has neither the mandate nor the venues could crowd out national
this bureaucracy at the EU level – tools to change this.14 funding: if member states lower
apart from the substantial costs in- their own contribution in proportion
volved – may also be problematic Member states are presumed to know to the EU funding, the (expected) so-
under the subsidiarity principle, sin- how best to use the revenues for effecti- cial imbalances resulting from the
ce there is no obvious advantage in ve compensation – including interactions ETS2 would remain unaddressed.
having the EU achieve the overall with existing social programmes. They ▶ Third, from a political–economic
objective of the revenue distribution. are also best positioned to identify vulne- perspective, this arrangement
Furthermore, the EU lacks access to rable groups and know how they can be would invite member states to con-
the necessary instruments to effect effectively supported. Where national tinue the “blame game” described
compensation by other measures, funds for a just transition already exist, above, shifting the blame for carbon
for example by lowering taxes or ETS2 revenue could be distributed pricing to the EU while claiming cre-
fees. through these channels: revenues from dit for spending the revenues and
▶ Finally, the realization of this option ETS2 allowance auctions would go di- providing social support.
requires some goodwill (or fantasy) rectly to the member states that auctio-
with regard to the political-econo- ned them, and remain there, much like In sum, these factors constitute a signifi-
mic motivation of actors: It is an of- existing arrangements for the current cant risk of misspending (relative to the
ten-described phenomenon that na- EU ETS. declared intentions), which could under-
tional governments like to take mine the acceptance of carbon pricing as
credit for positively perceived (soci- However, it should be noted that even an instrument.
al) measures, but in return Brussels under this option, member states’ use of
is made the scapegoat for unpopu- the revenues from the ETS2 would be Taken together, therefore, Options I and
lar developments. Against this back- subject to certain guidelines: while there IV represent outliers that could conceiva-
drop, it is hard to imagine that nati- would be no restrictions on linkage or bly work if many improbable preconditi-
onal governments would simply co-financing through any additional nati- ons were fulfilled, but which also carry
concede the credit and the praise onal measures, the target areas for ex- significant risks – political, legal, admi-
for the social balancing of the ETS2 penditure would at least be broadly defi- nistrative and procedural. The next stage
to the EU. ned.15 Nevertheless, such criteria would of analysis focuses instead on the two
allow member states wide-ranging dis- middle-ground options: the proposed
cretion in choosing what to fund, again SCF and an alternative arrangement, the
similar to the current ETS.16 SCM.
13 There are indeed those who argue against any EU-designed social compensation in the context of ETS2, calling for any engagement to be
strictly optional and at the member-state level (cf. Schmidt & Frondel 2022).
14 There is also a legal aspect to this option: While there is no mandate to provide harmonized welfare systems across the EU, the EU shares
non-exclusive competences to support and complement the activities of the member states in the field of social policy (Art. 151, 153 of the Treaty
on the Functioning of the European Union [TFEU]). However, where the purpose and focus of a measure is the protection of the climate, the EU’s
non-exclusive environmental competence is primarily relevant. When the EU uses this competence and bases a measure on Art. 192 of the TFEU,
the EU shall take into account social aspects when defining and implementing its policies and activities (compare also Art. 9 TFEU). Thus, when it
comes to the EU’s environmental regulation, the EU shall consider the economic and social development of the Union as a whole and the balan-
ced development of its regions (Art. 191 para. 3 of the TFEU).
15 Note that under the current ETS directive, member states should use at least 50% of ETS revenues to tackle climate change, social dimension
included (Art. 10(3); COM-Proposal revision ETS-Dir.).
16 This means that no tightening of conditions, compared to the status quo, is compatible with Option IV, and the set of criteria formulated in
9
the Commission’s SCF proposal must be rejected.Step 2: Comparing Option II (Social lowing it to front-load the SCF. This addi- levant member state and SCF funds
Climate Fund) with Option III (Social tional funding would facilitate spending would be distributed to the member
Climate Mechanism) on measures at the very start, or even in state according to a pre-defined schedu-
advance, of implementing the ETS2. It le, conditional upon achieving the mile-
The two options in the middle of Figure would also protect funding against annu- stones and targets set out in the SCP.21
2.1 – SCF and SCM – represent two mo- al fluctuations in ETS2 revenues. The al- Ex post, each member state would be
derate approaches for strengthening the location of the SCF’s resources, and obliged to report to the Commission on
social aspect of EU climate policy.17 hence their availability for member the implementation of its plan as part of
states’ social programmes, would follow its integrated national energy and clima-
Option “II is the SCF proposed by the Eu- a calculation formula based on six mea- te progress reports.
ropean Commission. It sees the distribu- sures of social vulnerability and energy
tional effects of ETS2 compensated for poverty.20 Option III, the proposed SCM, is an alter-
through a dedicated fund established at native design that could still achieve the
the EU level. Its specific objective would Since the SCF would be located at the EU same objective of balancing the distribu-
be to support vulnerable households, mi- level and managed by the European tional effects of the ETS2, but without re-
cro-enterprises and transport users Commission, the use of funding by mem- course to the EU budget. It thereby em-
through temporary direct income sup- ber states would be subject to an explicit phasizes the responsibility of member
port and through measures and invest- five-step approval procedure, providing states for social policy and gives them
ments intended to increase the energy for strong Commission oversight: In the more leeway to define and implement
efficiency of buildings, to decarbonise first step, each member state would concrete measures.
heating and cooling in buildings, to inte- have to submit a Social Climate Plan
grate energy from renewable sources, (SCP) with “a coherent set of measures One fundamental difference is that un-
and to improve access to zero– and low- and investments”, together with an der the SCM, no new fund would be crea-
emission mobility and transport.18 updated version of its National Energy ted at the EU level. Instead, ETS2 reve-
and Climate Plan. Once the SCP (or a re- nues would remain entirely with member
In the future, member states would be vised version of it) has been assessed states and frontloading and smoothing
obliged to pay 25% of the revenues from and approved, the Commission would would need to happen at the national le-
ETS1 and ETS2 into the EU budget,19 al- conclude a legal agreement with the re- vel, e.g. through existing funds.22 To
achieve a distribution of financial re-
sources between member states that re-
Table 1: Key characteristics — Social Climate Fund vs. Social Climate Mechanism flects social needs, the SCM would requi-
re the allocation of ETS2 allowances to
member states to include an element of
Option SCF SCM solidarity.23 The allocation of allowances
would not simply be based on historical
Realizes a targeted allocation of emissions (as in the SCF proposal) but
resources to member states on Requires that a social compo-
the basis of a calculation formu- nent (e.g. the established al- would also have to be based on criteria
Financial allocation across la that takes social criteria like location key of the ESR) be of fairness, and on exposure and vulne-
member states social vulnerability and energy taken into account in the al-
rability to ETS2-induced price increases.
poverty at the individual level location of ETS2 allowances
into account to member states Using the established allocation rules of
the ESR, rather than devising an entirely
Establishes a higher degree new distribution key, could simplify the
Provides for institutionalized ex of ownership and responsibi-
Scope and stringency of EU implementation of the SCM and make it
ante control by the Commission lity on the part of the mem-
oversight easier to agree on.24
to ensure effective supervision ber states, who can ultimate-
ly implement their own ideas
As member states hold the money under
Coupling with MFF allows for Whether frontloading and
frontloading and, during an on- smoothing are possible at the the SCM proposal, decision-making on
Possibilities for frontloading
& smoothing
going budget period, funding is national level depends on the spending is also leaner, with less super-
independent of fluctuating ETS2 individual fiscal position of
vision by the Commission. In contrast to
revenues member states
the five-step approval procedure of the
17 Tables A2.1, A2.2 and A2.3 in the Appendix depict how these options map onto the eight guiding questions.
18 Art. 1 SCF-Reg.
19 As Table A2.2 in the Appendix documents, exceptions are possible until 2030 (derogation), including deviations from the principle of a uniform
transfer ratio of 25%.
20 See Art. 13 with Annexes I and II in the proposed SCF-Regulation.
21 See Table A2.3 in the Appendix for further institutional details, e.g. on the governance of spending.
22 In 2016, seven member states (Croatia, Germany, Hungary, Lithuania, Portugal, Slovenia and Slovakia) had dedicated national energy and/or
climate funds into which EU ETS revenues would flow. See Velten et al. (2016), p. 20.
23 See the detailed discussion of this point in Section 3.
24 See Table A2.2 in the Appendix for further details on the allocation of funds under the SCF and SCM proposals. Using the ESR allocation for-
mula would have the additional benefit of keeping the distribution of the combined revenues from ETS2 and AEA trading (largely) the same, irre-
10 spective of how ETS2 and AEA prices evolve, i.e. irrespective of which share of total trading volume flows through which channel.SCF, the SCM could entail a three-step Discussion and recommendations In summary, both the SCF and SCM offer
consultation process: Member states benefits and risks, and deciding which is
would inform the Commission ex ante in From the broad range of options availa- preferable depends on two specific ques-
writing of their planned programmes, ble for mitigating the distributional im- tions: First, are member states willing
and the related expenditure needs. The pacts of extended EU emissions trading, and able to provide adequate social com-
Commission would assess these propo- this analysis isolated four ways of organi- pensation on their own? Second, to what
sals and, if necessary, issue recommen- zing the social component. It started extent do the Commission and member
dations for adjustments based on their with the two endpoints of the spectrum: states share an understanding of “just”
assessment of whether the envisaged one in which the processes are concen- climate policy, which is a necessary con-
programmes are likely to meet the over- trated to the maximum degree at the EU dition for sincere cooperation?
arching social criteria; however, the final level (and hence Brussels would be sen-
decision on the use of funds would rest ding cheques to all eligible EU citizens), If the capabilities of individual member
with member states. The only constraint and one that reserves maximum discreti- states, and their commitment to social
would be that a member state would on for member states, in terms of both balancing, are considered to be high,
have to declare its reasons, should it decision-making and implementation. In then the SCM appears to be the prefer-
choose to deviate from the Commis- sum, these extreme solutions fail to con- red option as it allows for a leaner struc-
sion’s recommendations.25 vince: they could conceivably work if ture and a higher degree of member-
many preconditions were fulfilled, but state ownership. However, if there is
As shown in Table 1, the SCF and SCM they also carry significant risks – politi- agreement on the interpretation of a just
differ mainly in terms of (i) the allocation cal, legal, administrative and procedural. transition combined with sincere coope-
of financial resources (SCF) or underlying In addition, Option I is based on very op- ration between the Commission and
allowances (SCM) across member states, timistic assumptions about the EU’s ad- member states, the SCF may be the su-
(ii) the scope and stringency of EU-level ministrative capacities and the readiness perior option: In principle, it allows for a
oversight, and (iii) the possibilities for of member states to hand over responsi- better achievement of the targets, espe-
frontloading spending and smoothing bility to the EU, while Option IV is based cially in member states that cannot
revenue flows. The juxtaposition illustra- on flawed assumptions about the EU’s frontload expenditures and smooth fluc-
tes that the SCF is characterised by a lack of competence in the area of social tuating ETS2 revenues via their national
high degree of financial stability: Coup- policy – if indeed this competence is even budgets.
ling with the MFF allows for frontloading relevant in this case.
and, during an ongoing budget period, Another important factor is the Commis-
funding is therefore independent of fluc- This leaves two alternatives: the Com- sion’s and member states’ capacity for
tuating ETS2 revenues. Under the SCM, a mission’s proposal for an SCF and an al- rational policymaking. This is important
comparable level of financial security can ternative option, namely the SCM. These for judging whether a higher degree of
only be achieved in fiscally sound mem- options can briefly be characterized as ownership and responsibility at state le-
ber states whose budgets have the ne- follows: vel, as within the SCM framework, would
cessary scope and flexibility for frontloa- ▶ The proposed SCF is characterized, be advantageous. Yet, any doubt about
ding and revenue smoothing. on the one hand, by a high degree the ability or will of member states to
of stability in terms of financial flows use funds appropriately would favour the
Through a higher degree of control on and, through stricter oversight and SCF, since it provides for effective super-
the part of the Commission (accompa- more extensive planning, has a vision by the Commission.26
nied by a greater administrative burden lower risk of resource misspending.
on both the EU and individual member On the other hand, it is more Another consideration is the desirability
states) and a higher degree of collective complex in terms of procedures and of using funds uniformly across member
resource mobilization in the form of joint carries a higher administrative bur- states (pro SCF) or whether a higher de-
frontloading and smoothing, the SCF den. gree of national fit is seen as more ad-
can achieve greater homogeneity of soci- ▶ The SCM option, by contrast, has a vantageous (pro SCM). It is ultimately a
al cushioning across member states comparatively light structure in matter of the appraisal and weighting of
than the SCM. Because the SCM depends terms of procedures and associated these aspects, together with policy prio-
more on the resources and capabilities administrative burdens, but also rities, and that will determine the prefe-
of individual member states, it carries entails a higher degree of uncertain- rence for either the SCF or SCM.
the risk of widening the differences bet- ty and volatility regarding financial
ween member states in terms of the flows. By giving more leeway to
speed and extent of social compensation. member states, it provides for more
It is worth noting, however, that the fi- room to experiment with different
nancial burdens to be offset (due to the approaches, but also carries a hig-
ETS2) are quite limited in relation to the her risk that the use of funds will be
size of national budgets. poorly aligned with EU objectives.
25 See Table A2.3 in the Appendix for further details, e.g. on the governance of spending.
26 In particular, the fact that disbursement is made in stages after verifying progress against agreed-upon milestones ensures intertemporal in-
11 centive compatibility: if a member state deviates from its SCP, it risks losing funding for the next stages of its plan.3. DISTRIBUTIONAL IMPLICA-
TIONS BETWEEN MEMBER
STATES (SOLIDARITY)
Authors: M. Kosch, K. Umpfenbach, J. Abrell, M. Pahle
Considering the interaction between impose a uniform EU-wide carbon price
the ETS2 and the ESR is essential for on the buildings and road transport sec-
the robustness of the social compensa- tors. While the scopes of the ESR and
tion mechanism ETS2 are not identical, they do overlap:
the ETS2 will cover emissions from buil-
The ESR is a main distributional element dings and road transport, while the ESR
of the EU’s climate policy architecture. covers all emissions that are not subject
Based on their GDP per capita and – to a to the ETS1, and thus includes emissions
lesser extent – their abatement potenti- from land use, agriculture, waste, dome-
al, some countries have more stringent stic navigation and small industries, as
targets than others; these range from well as emissions from buildings and
–50% for richer countries to –10% for road transport covered in the ETS2 (Eu-
poorer countries, relative to 2005 levels. ropean Commission 2021b, p.2).27 In its
For all member states to fulfil their re- impact assessment for the revised ESR,
spective targets, richer countries need to the Commission states that “about half”
undertake more mitigation and therefo- of current ESR emissions would be sub-
re spend more on abatement measures. ject to the ETS2 (European Commission
2021a, p. 8). While it may seem appe-
The ESR also foresees several flexibility aling to complement the efficiency of a
options, including the option for coun- second ETS with the distributional prin-
tries that overshoot their annual targets ciples of the ESR, the interaction bet-
to sell their excess AEAs to countries ween the two systems increases uncer-
that miss their targets. The resulting re- tainty in three dimensions:
venues can be used to finance abate-
ment measures or cushion the distributi- (i) AEA trade will likely be limited
onal impacts of climate policies.
The impact assessment does not contain
The current Commission proposal re- a detailed analysis of AEA trade, but the
tains ESR targets as a national compli- Commission appears to assume that it
ance mechanism, and extends the ETS to will take place, since several member
27 According to calculations by Fraunhofer ISI for the European Commission, based on EU emissions for 2017, 56 % of emissions covered by the
ESR in this year would fall under the new ETS2 (European Commission 2021a, p. 367).
12states are expected to generate a sub- Other analyses (e.g. Abrell et al. 2022b; and consequently less progressive ef-
stantial surplus of AEAs28 (European Pietzker et al. 2021) suggest it might be fects from revenue recycling.30
Commission 2021b, p. 59). This would re- much higher. The ETS2 price is highly
sult in a financial transfer from (mostly) uncertain and hard to predict because it Scenario analysis to explore the effects
richer to (mostly) poorer member states. depends on various factors such as the of AEA trade and ETS2 price levels
However, in the compliance period to marginal abatement costs in the buil-
2020, AEA trade has been extremely li- dings and road transport sectors, price AEA trade volumes and ETS2 price levels
mited; so far, the only example of such a elasticities and the behaviour of financial will affect the cost-effectiveness and
trade was when Malta used AEAs actors. These are less well understood equitable distribution of SCF funds. In
purchased from Bulgaria for compliance than the abatement options and costs, the following analysis, three scenarios
(European Commission 2021d, p. 8). as well as the preferences of relevant are explored using a static global Com-
actors, in the energy, manufacturing and putable General Equilibrium (CGE) mo-
In practice, AEA trade faces significant aviation sectors covered by ETS1. Finally, del (see “Model & Assumptions” Box be-
barriers: First, the limited number of the price depends on the stringency and low). The “base case” scenario is drawn
market participants, in combination with effectiveness of national companion poli- from the EUs own impact assessment
the penalty payments for non-complian- cies targeting the ETS2 sectors and thus and two additional scenarios (discussed
ce, will likely lead to monopoly rents, interacts with the ESR, i.e., if more strin- in detail below) are added to disentangle
where member states with excess AEAs gent national policies are implemented the impacts of AEA trade from ETS2
use their position to set excessively high to fulfill individual ESR targets, the ETS2 price levels, as illustrated in Figure 3:
AEA price levels. Second, there is no price will likely be lower. ▶ Base case (upper right quadrant):
transparent market with a price signal. We assume the coexistence of AEA
Member states thus have to find out the (iii) Revenue allocation is volatile trade and the ETS2. For the ETS2,
abatement costs of all firms and house- we assume a moderate price of 50
holds to derive the “fair” exchange price. According to the Commission’s proposal, €/tCO2 with 25% of revenues alloca-
Relatedly, in the absence of a liquid mar- around 9 billion euros29 would be alloca- ted to the SCF for distribution
ket, member states have high transacti- ted to the SCF annually. For the assu- among member states, according
on costs for negotiating bilateral con- med price of 48 €/tCO2 (in the MIX sce- to SCF criteria. The remaining 75%
tracts. Third, governments may prefer nario), this corresponds to 25% of total is distributed among member
national mitigation measures over AEA ETS2 revenues. The SCF allocates these states according to historic emissi-
trade, even if they come at a higher cost, revenues to member states based on so- ons from 2016–2018. We assume a
because domestic climate policy measu- cioeconomic indicators such as energy functioning AEA trade between
res are seen as having more domestic and transport poverty levels and gross member states, exploiting all possi-
benefits, especially job creation. Moreo- national income per capita (European ble efficiency gains from trade.
ver, a majority of member states’ natio- Commission 2021c, Annex I). The remai- Member states achieve their indivi-
nal climate targets are fixed in national ning ETS2 revenues would be distributed dual ESR targets through national
climate laws, which typically require among member states based on their abatement measures and trade. In
emissions to be reduced domestically. historic emissions in the period this case, the total AEA trade vo-
2016–2018. lume amounts to around 15% of to-
(ii) The ETS2 price is uncertain tal ESR emissions.31
Unfortunately, the proposal does not fo- ▶ Scenario 1 (upper left quadrant): No
In its impact assessment, the Commissi- resee an automatic adjustment of the re- AEA trade.
on considered two main carbon pricing venue allocation in response to changing ▶ Scenario 2 (lower right quadrant): A
scenarios, both with relatively low ETS2 ETS2 prices. For the extreme case, where higher ETS2 price of 150 €/tCO2.
prices. In the MIX scenario, the ETS2 car- the SCF is fixed at around 9 billion € per
bon price reaches 48 €/tCO2 in 2030, year, the SCF share of total funds availa- All scenarios are geared towards the
and in the MIX-CP scenario with less am- ble for redistribution between and within 2030 target of at least a 55% greenhou-
bitious companion policies (and hence a member states decreases with an increa- se gas reduction compared to 1990. For
stronger role for the carbon price), it in- sing carbon price. This means less funds 2030, 64% of emissions are allocated to
creases to a maximum of 80 €/tCO2 (Eu- to support low income and vulnerable the ESR sectors, with the rest being allo-
ropean Commission 2021d, p. 121). households relative to the carbon price, cated to the sectors covered under ETS1.
28 In the impact assessment for the ESR proposal, the Commission estimated that Bulgaria, Sweden, Luxemburg, Romania, Slovenia, Italy, Cze-
chia, Spain, Slovakia, Poland, Portugal, Hungary, Croatia and Greece would generate surplus AEAs ranging from 1 %–29 % of their 2030 emissi-
ons budget (presented in order of increasing surplus). A gap is expected for Lithuania, France, Latvia, Finland, Cyprus, Belgium, the Netherlands,
Germany, Estonia, Austria, Denmark, Ireland and Malta, ranging from 3 %–55 % of the 2030 emissions budget. This distribution correlates – but
does not completely match – with the GDP per capita distribution: Luxembourg and Sweden would generate a surplus despite being above-avera-
ge income, while Estonia, Cyprus, Latvia, Lithuania and Malta are expected to face a gap despite being below the average for EU states (European
Commission 2021b, p. 156).
29 According to the proposal, the SCF would be fixed in size (Art 9): 23.7 billion euros for 2025–2027 and 48.5 billion euros for 2028–2032.
30 In practice, it is likely that SCF revenues will be adjusted depending on the carbon price. However, under the current proposal, it cannot be ea-
sily adjusted because it would be funded through the MFF which has already been set to 2028; any adjustments could only be made thereafter
31 The highest demand for AEA trade comes from Germany (50 Mt) and France (27 Mt), whereas the highest supply comes from Poland (62 Mt)
13
and Romania (32 Mt).You can also read
