With its proposed reform of the EU Emissions Trading Scheme (EU ETS), the European Commission is bringing carbon pricing policies to new areas such as shipping, road transport, and buildings. However, it is the fate of industry and ordinary people that is getting all the political attention.
The EU ETS currently covers the power sector, the manufacturing industry, and intra-EU flights.
With the reform, the Commission proposes to extend the EU carbon market to shipping and aviation while setting up a new separate ETS to tackle emissions from transport and heating fuels.
The aim is to cut the EU’s carbon emissions by 55% before the end of the decade and bring clean energy to areas like transport, buildings and industry, where fossil fuels still dominate and emissions reductions are more costly to achieve.
But European Commission President Ursula von der Leyen also made it clear: Decarbonisation efforts cannot come at the expense of businesses and workers, who need to come out stronger from the green transition.
“The European Green Deal is our growth strategy,” von der Leyen insisted when presenting the EU’s new ‘Fit for 55’ package of climate policy proposals on Wednesday (14 July).
And fairness will be one of the key priorities when extending carbon pricing policies to new areas, with the creation of a new social climate fund to shield the poorest households from higher fuel prices.
Over the 2025-2032 period, the new fund is expected to mobilise €72.2 billion in fresh money, providing direct income support for vulnerable households impacted by the change, and supporting investments into clean heating and mobility.
“If you look at transformations in Europe, every transformation, we were successful when we combined market-driven measures with the right social balance,” von der Leyen said. “This is at the core of our social market economy”.
More funding under the reformed ETS
In the reformed ETS, this means more funding will be channelled to the EU’s innovation and modernisation funds, which will roughly double in size.
“We are not going to let our industry down. And we’re not going to make policies to de-industrialise the EU, it would make no sense from an economic and environmental point of view,” said a senior EU official who briefed journalists before the Commission’s ‘Fit for 55’ package was presented.
The innovation fund, which supports first-time innovators in developing low-carbon technologies, will be almost doubled in size with a firepower of more than €50 billion at current ETS prices over ten years, the official explained.
At the same time, the European Commission will more than double the modernisation fund, meant to help poorer EU member states invest in clean energy.
The move is meant to assuage concerns of countries like Poland, which is still reliant on coal for close to 80% of its electricity and faces higher decarbonisation costs than other member states.
However, the proposed reform will not bring the money necessary for the transformation, according to the Polish electricity industry, which estimates that new investments worth €136 billion will be needed by 2030 in Poland to reach the EU’s clean energy goals.
“This amount exceeds four-fold the total amount of currently available national and EU funds for the decarbonisation of the Polish economy, and thus additional financial support will be needed,” said PKEE, the Polish electricity sector association.
“We believe that the Modernisation Fund should be increased significantly,” it said in a statement.
Another concern for Poles is the restrictions the Commission has placed on the modernisation fund, which prohibits investments in natural gas. According to PKEE, gas power plants and cogeneration units in district heating systems are “the only solution to progressively withdraw coal-fuelled units and switch to less emitting gas as an intermediate fuel on the way to carbon neutrality”.
A fairer market?
The demands of the Polish electricity sector illustrate a fundamental shift in the political debate over carbon pricing. With the reform of the EU ETS, much of the conversation is now expected to focus on how the effort should be distributed between EU member states and across industries.
As Europe tightens the cap on emissions, EU carbon prices are expected to reach €85 per tonne towards the end of the decade, according to the European Commission. Others believe the price could even reach €120 by then.
“A carbon price towards €100 per tonne by 2030 is pretty much in line with our own forecasts,” said Hæge Fjellheim, director of carbon research at Refinitiv, a carbon market data analysis firm.
And at those kinds of prices, solidarity with poorer households but also between EU member states will become central to the political debate, she told EURACTIV in a telephone interview.
“With a higher carbon price, you also get more revenues to help decarbonise the economy. Who should be the recipients of those funds is going to be one of the key subjects of discussion in the next few years,” Fjellheim said.