Wednesday, December 1

Climate social fund is intended to cushion higher CO2 prices

The EU Commission wants to set up a social fund to alleviate high CO2 prices for houses and traffic. In addition, Brussels wants to remove more emission rights and involve industry more.

Need space, but no CO2 certificates: bicycles at the University of Freiburg.

Need space, but no CO2 certificates: bicycles at the University of Freiburg.

Dhe proponents of EU emissions trading have long struggled to get it recognized as an instrument for reducing CO2 emissions. That has changed since the prices for CO2 rights have risen to more than 50 euros per ton, thus creating a clear incentive to abandon coal-fired power generation. The European Commission therefore wants to make emissions trading a central element of climate policy on the way to climate neutrality in 2050. The “Fit for 55” package announced for mid-July on how the EU is to reduce emissions by 55 percent by 2030 will contain proposals for reform and expansion of emissions trading to include buildings and transport. Much is still in flux, but the first details and a draft have leaked and are available to the FAZ.

So far, emissions trading has covered power generators, industry and parts of air traffic. That corresponds to 40 percent of the emissions. 12,000 companies have to show CO2 rights for their emissions. The number of newly issued rights is reduced every year. In addition, companies that reduce emissions can sell excess CO2 rights and thus have an incentive to invest in green technology. As can be seen from a draft for the new emissions trading rules, the Commission wants to set up a separate trading system for buildings and transport. It makes no sense to integrate both sectors into the existing trade, because the avoidance costs – i.e. the costs of reducing emissions – are much higher in transport than in industry, according to the Commission. It therefore also wants to adhere to the CO2 limit values ​​for new vehicles.

Climate protection social fund is intended to mitigate social consequences

There is great resistance to the planned expansion, especially from France and Eastern European countries. They fear that a rise in gasoline prices will lead to social tensions. The Commission therefore wants to start with a low CO2 price for transport and buildings and only auction all rights from 2026. It wants to cushion the social consequences with a new “climate protection social fund”, which is to be fed from the income from emissions trading for buildings and traffic. In addition, it wants to oblige the states to spend the revenues from classic emissions trading exclusively on climate protection, with a special focus on the renovation of the houses of low-income families.

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It is still unclear how much the emissions in traditional emissions trading should decrease. So far it is 43 percent compared to 2005. This could be between 60 and 63 percent, according to Brussels. There are no numbers in the draft itself. The number of rights would decrease correspondingly more each year – according to the draft retrospectively to the year 2021. Today the number of CO2 rights falls by 2.2 percent per year. This could be 2.8 percent. In addition, the Commission wants to reduce the number of excess rights on the market more. More excess rights are to be placed in the “market stability reserve” and later permanently deleted. The reserve introduced in 2018 played a major role in stabilizing the market, which was flooded by excess CO2 rights from previous years.

Controversial point: free certificates for the industry

It is still controversial in the Commission under which circumstances there should continue to be free certificates for industry. The EU is currently trying to protect its industry from falling too far behind in international competition by allocating part of the certificates free of charge. For this, however, the Commission now wants to introduce a CO2 border tax, with which the importation of basic materials such as steel and cement from third countries without strict climate targets will be charged. For the sectors that are protected by the CO2 tax, there should no longer be any free certificates according to the emissions trading scheme. The Commission argues that such double protection would be incompatible with World Trade Organization (WTO) rules.

Industry representatives see it differently. The border tax only protects companies in the EU, emphasizes the steel industry association. Free certificates, on the other hand, also allowed them to keep up with exporting steel to the world market. This apparently meets with open ears with Trade Commissioner Valdis Dombrovskis. He urges the free allocation to expire over several years and at the same time the gradual introduction of the CO2 border adjustment by 2035. What is certain, however, is that the free allocation is tied to stricter requirements. The companies have to bid for more certificates one way or another.