The European Commission will launch a fund to alleviate the societal cost of expanding the EU carbon market – the emissions trading scheme (ETS) – to buildings and road transport, according to a leaked draft seen by EURACTV.
The EU executive is due to announce a new package of climate legislation on Wednesday (14 July), aiming to bring the EU in line with its new 2030 objective of cutting emissions by 55% compared to 1990 levels.
The legislative package includes a planned extension of the EU ETS to heating and transport fuels as a way to create incentives for emission cuts there, according to leaked documents obtained by EURACTIV.
The move will be controversial for Poland and senior lawmakers in the European Parliament who have warned that this risks raising fuel prices and hit Europe’s poorest households.
“Do not make the mistake of extending the carbon market to heating and fuel. We experienced it in France, it gave us the Yellow Vests,” French MEP Pascal Canfin warned Brussels as the European Parliament passed the EU’s landmark climate law.
In its draft proposal, the European Commission itself admits that the ETS is a “regressive” form of carbon pricing mechanism that will hit the poor proportionately more than the rich.
Putting a carbon price on heating fuels “will not affect households equally, but would likely have a regressive impact on disposable income, as low-income households tend to spend a greater proportion of their income on heating,” the Commission says in a cost-benefit analysis of the revised ETS directive.
The extension “will have significant social impacts which may disproportionally affect vulnerable households, vulnerable micro-enterprises and vulnerable transport users who spend a larger part of their incomes on energy and transport and who, in certain regions, do not have access to alternative, affordable mobility and transport solutions,” according to the leaked draft.
To address this, the European Commission plans to launch a climate action social facility to compensate poorer households and help them switch to cleaner fuels.
According to the draft, the new fund will provide EU countries with money “to support their measures and investments intended to increase energy efficiency of buildings, to carry out building renovation, and to decarbonise heating and cooling of buildings, including the integration of energy from renewable sources and to finance zero- and low-emission mobility and transport”.
The measures should benefit vulnerable households, micro-enterprises and transport users who will be particularly affected by the change. Planned actions will need to be laid out in the national energy and climate plans that are submitted every year to the European Commission.
According to the draft proposal, the new fund will use 20% of the expected revenues generated by the new ETS covering buildings and road transport. The fund will be frontloaded, with the first payments expected in 2025, the year before the launch of the new ETS.
Consumers pay, polluters don’t
There are also concerns when it comes to who pays for Europe’s emissions. The extension of the ETS will see consumers face more direct costs, but there are fears that industrial pollution could slip through the net.
Under the current system, energy-intensive industries like steel and cement were offered free CO2 emission credits in order to preserve their competitiveness and prevent them from relocating abroad to places where it is cheaper to pollute.
The carbon border adjustment mechanism (CBAM) – another proposal due on Wednesday – is meant to perform this role, removing the need for free allocations. The idea is to phase these out as the carbon border levy comes in.
But a recent leak of the proposal suggests that Europe could be waiting until 2036 to see the free allocation system scrapped for good.
The preferred option “considers also a 10 years transitional period starting at the earliest in 2026 during which the free allocations of allowances under the EU ETS would be gradually phased out by 10 percentage points each year and the CBAM would be phased in”.
“During that transitional period, the CBAM would be reduced proportionally to the amount of free allowances distributed in a given sector,”states the leaked draft.
That could mean free allocations until 2036 – six years later than the objective laid down in the current ETS.
“A CBAM which would open the door to free allowances until 2036 would be worse than having no CBAM at all,” Agnese Ruggiero from Carbon Watch Market told EURACTIV.
“Instead of having a CBAM as an alternative to ETS carbon leakage measures, we would end up with a CBAM which increases carbon leakage measures, letting large polluters off the hook and sending a very negative signal internationally,” she added.
[Edited by Frédéric Simon]
CBAM Legal Act DRAFT (2) revised 2 July
> Read the full draft ETS and CBAM proposal below:
Proposal for a Directive of the European Parliament and of the Council (EN)