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An ETS-2 for buildings and road transport: Impacts, vulnerabilities and the role of the Social Climate Fund

Presentation by Dr. Johanna Cludius, FSR 8th Annual Conference on the Economic Assessment of European Climate Policies, 2. December 2022

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FSR 8th Annual Conference on the Economic Assessment of European
Climate Policies: An ETS-2 for buildings and road transport: Impacts,
vulnerabilities and the role of the Social Climate Fund
Johanna Cludius, 02.12.2022
Introduction to the ETS-2 and Social Climate Fund
Proposed ETS-2 covering buildings and road tranport and proposed
Social Climate Fund
FSR Conference | 02/12/2022 3
• In their Fit for 55 package, the COM proposes to set up an ETS-2 covering CO2
emissions from buildings and road transport not covered by the EU ETS
• The ETS-2 is set to be an upstream system, starting in 2026 and its market set to
be separate from the EU ETS
• Emissions covered by the ETS-2 still fall under the ESR
• In order to protect the vulnerable from excessive costs, the COM proposes to set up
a Social Climate Fund (SCF) worth 72 billion Euros for 2025/26-2032 (about 25%
of ETS-2 revenues at projected prices)
• Funds made available to all Member States, but with some redistribution towards
lower-income MS. Funds are made available following the submission of Social
Climate Plans by the Member States
Overall EU emissions, reduction goals and coverage of ETS
FSR Conference | 02/12/2022 4
Source: Oeko-Institut 2022
• ETS-2 set to
cover > 50%
of ESR
emissions
(remainder
mainly
agriculture)
• Reduction of
-43% vs
2005 levels
by 2030
envisaged
-500
500
1 500
2 500
3 500
4 500
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
GHG
emissions
[Mt
CO
2
eq.]
Extra-EU
navigation
Extra-EU aviation
Intra-EU
navigation
Intra-EU aviation
Domestic aviation
ESR without ETS 2
ETS 2
ETS stationary
ETS- Industry
ETS - Energy
industries
LULUCF
ESR
ETS stationary
ETS 2
ETS stat: -62% vs 2005
ESR: -40% vs 2005
ETS 2: -43% vs 2005
LULUCF =
-225 Mt CO2 eq
Total: -55% vs 1990
Projected price paths under the ETS 2
FSR Conference | 02/12/2022 6
Source: Oeko-Institut (2022):
https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf
• Price projections
vary
• 50 – 140 EUR/t
CO2 (and more)
possible in 2030
• Market is set to
be separate from
the ETS-1
•
ETS-2 and SCF in the ongoing trialogue discussions
FSR Conference | 02/12/2022 7
COM EP Council
Scope All fossil fuels not
covered by EU ETS in
transport and buildings
All fossil fuels not covered by the EU ETS
Private households only phased in
after a review in 2029 (conditional on
level of fuel prices and SCF operation)
Like COM
Possible opt-out for MS
until 2030 with national
carbon price > EU price
Start 2026 (MRV from 2025) 2025 (MRV from 2024) only commercial 2027 (MRV from 2024)
Size of SCF 72 billion EUR 72 billion EUR (+150 mln allowances) and
adjustment for rising prices
59 billion EUR (+150 mln
allowances)
Ceiling price 50 EUR/tCO2 (reviewed in 2029)
+ limiting cost pass-through to 50% max
Excessive
price control
If doubling of price
within 6 months
If price increases 1.5 times
within six months
Impacts across Member States and households
● Large difference in
income levels
‒ across MS and
‒ across income
groups
● Income for lowest
income group in
D/FR/BE/DE… is
higher than for
highest income
group in RO/BG/HU
FSR Conference | 02/12/2022
Mean net equivalent income per year across Member
States and income quintiles
9
Source: Oeko-Institut (2022):
https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf
Impacts determined by incomes and CO2 intensity
FSR Conference | 02/12/2022 10
Source: Eurostat - Air emissions accounts by NACE Rev. 2 activity [env_ac_ainah_r2], Eurostat -
Distribution of income by quantiles - EU-SILC and ECHP surveys [ilc_di01]; Mean and median
income by household type - EU-SILC and ECHP surveys [ILC_DI04]
• Impacts will be higher
for MS with
• Lower incomes
• Higher CO2 intensity in
buildings and road
transport
BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
HR
IT
CY
LV LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
45 000
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Household
income
per
year
CO2 emissions in buildings and road transport per capita per year
● Households in lower
income Member States
more affected
● Fossil fuel intensity of
the heating system
and structure of
transport system play
a large role in
determining impact
FSR Conference | 02/12/2022
Share of CO2 costs in total household consumption expenditure
(CO2 price at 50 euro/t CO2)
11
Source: Oeko-Institut (2022):
https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf
● Impact regressive
in all Member
States
● (Not necessarily
the case for
transport where
car ownership
plays a large
role)
FSR Conference | 02/12/2022
Share of CO2 costs for heating in total household consumption
expenditure by income quintile (CO2 price at 50 euro/t CO2)
12
Source: Oeko-Institut (2022):
https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf
Who should be supported by the SCF?
From COM proposal for a Social Climate Fund (SCF):
FSR Conference | 02/12/2022 14
• ‘vulnerable households’ means households in energy poverty or households,
including lower middle-income ones, that are significantly affected by the price
impacts of the inclusion of buildings into the scope of Directive 2003/87/EC and lack
the means to renovate the building they occupy;
• ‘vulnerable transport users’ means transport users, including from lower-middle-
income households, that are significantly affected by the price impacts of the
inclusion of road transport into the scope of Directive 2003/87/EC and lack the
means to purchase zero- and low-emission vehicles or to switch to alternative
sustainable modes of transport, including pub-lic transport, particularly in rural and
remote areas.
→ Concept of vulnerability and providing targeted support
A selection of vulnerability indicators for expenditures on energy
and heat
FSR Conference | 02/12/2022 15
Source: Own calculation based on the EU HBS data, year 2015, for the 10% threshold indicator
and the LIHC indicator and based on the EU SILC data, year 2019, for the indicator looking at the
inability to keep the home warm and the indicator looking at arrears on utility bills; HBS data
missing for Italy and Austria; Vulnerability displayed as share of persons in total population.
• Many different
vulnerability
indicators
availalbe
• All measuring
different
aspects of
vulnerability
• More
vulnerable HH
in lower
income MS,
especially for
expenditure-
based
indicators
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
35,0%
40,0%
45,0%
RO BG HU HR PL SK LT LV EL CZ PT EE SI MT ES CY IT BE FR DE NL FI SE AT IE DK LU
below 60% of median above 60% of median
percentage
of
total
population
of average net equivalent income in MS
Energy/Heat
10% threshold LIHC inability to keep home warm arrears on utility bills
Income as a driver of vulnerability in the heating sector
FSR Conference | 02/12/2022 16
Source: Own calculation based on the EU HBS data, year 2015, for the 10% threshold indicator
and the LIHC indicator and based on the EU SILC data, year 2019, for the indicator looking at the
inability to keep the home warm and the indicator looking at arrears on utility bills; HBS data
missing for Italy and Austria; Vulnerability displayed as share of persons in total population.
• In all MS,
lowest income
deciles most
prominent
amongst those
vulnerable in
energy/heat
• (Other factors
play a role, e.g.
location for
mobility)
17,7%
19,4%
18,2%
21,9%
19,5%
14,5%
15,9%16,3%
21,2%
8,6%
18,3%
14,2%
15,2%
14,6%
21,4%
13,5% 13,5%
16,1%
15,5%
13,5%
5,6%
9,5%
16,0%
12,7%
21,2%
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
RO BG HU HR PL SK LT LV EL CZ PT EE SI MT ES CY IT BE FR DE NL FI SE AT IE DK LU
below 60% of median above 60% of median
percentage
of
total
population
of average net equivalent income in MS
Energy/Heat
1st decile 2nd decile 3rd decile 4th decile 5th decile
6th decile 7th decile 8th decile 9th decile 10th decile
What should support from the SCF look like?
FSR Conference | 02/12/2022 18
Adelphi, CSD, Öko-Institut, WISE (2022): https://www.oeko.de/fileadmin/oekodoc/EUKI-
Policy-Brief-Supporting-Households-in-the-Energy-Price-Crisis.pdf
From COM proposal for a Social Climate Fund (SCF):
FSR Conference | 02/12/2022 19
The Plan shall include national projects to:
(a) finance measures and investments to increase energy efficiency of buildings, to
implement energy efficiency improvement measures, to carry out building renovation,
and to decarbonise heating and cooling of buildings, including the integration of
energy production from renewable energy sources;
(b) finance measures and investments to increase the uptake of zero- and low-
emission mobility and transport.
→ Focus on reducing energy consumption and increasing energy efficiency
(direct financial support only as a temporary measure)
Using the SCF to exchange fossil heating systems to
heat pumps for the most vulnerable
FSR Conference | 02/12/2022 20
Source: Oeko-Institut (2022):
https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf
● SCF sufficient to switch
to heat pumps for all
vulnerable households
in lower income MS
‒ Even with very high
exchange rate of
heating system (7%
p.a.)
● Additional funding by
MS would increase
available funds
● Investment in building
insulation and measurs
in transport sector not
considered
‒ Would increase support
needs
Conclusions
FSR Conference | 02/12/2022 21
• Proposed ETS-2 has a considerable level of ambition
• Projected price paths show a broad range and high prices are a concern for many MS
• Low-income / vulnerable households and MS most affected by high CO2 prices
• BUT: Lots of possibilities for redistributing revenues and making the system progressive
• Definition of who is vulnerable: Many possibilities! Some indications from the COM, the EP,
EPOV and various other sources
• SCF can go a long way in protecting vulnerable households
• Targeting is key
• Focus on reduction of consumption (renewables, efficiency, modal split) is key
• Future challenges: Define vulnerable households, design the appropriate support
programs, monitor efficient outcomes
Thank you for your kind attention
Projects cited in this presentation:
• Oeko-Institut (2022) The Social Climate Fund – Opportunities and
Challenges for the buildings sector
https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf
• Adelphi, CSD, Oeko-Institut, WISE (2022) Facilitating Just Carbon
Pricing in Central and Eastern Europe (ongoing)
Policy Brief: https://www.oeko.de/fileadmin/oekodoc/EUKI-Policy-Brief-
Supporting-Households-in-the-Energy-Price-Crisis.pdf
Policy Report: forthcoming

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An ETS-2 for buildings and road transport: Impacts, vulnerabilities and the role of the Social Climate Fund

  • 1. FSR 8th Annual Conference on the Economic Assessment of European Climate Policies: An ETS-2 for buildings and road transport: Impacts, vulnerabilities and the role of the Social Climate Fund Johanna Cludius, 02.12.2022
  • 2. Introduction to the ETS-2 and Social Climate Fund
  • 3. Proposed ETS-2 covering buildings and road tranport and proposed Social Climate Fund FSR Conference | 02/12/2022 3 • In their Fit for 55 package, the COM proposes to set up an ETS-2 covering CO2 emissions from buildings and road transport not covered by the EU ETS • The ETS-2 is set to be an upstream system, starting in 2026 and its market set to be separate from the EU ETS • Emissions covered by the ETS-2 still fall under the ESR • In order to protect the vulnerable from excessive costs, the COM proposes to set up a Social Climate Fund (SCF) worth 72 billion Euros for 2025/26-2032 (about 25% of ETS-2 revenues at projected prices) • Funds made available to all Member States, but with some redistribution towards lower-income MS. Funds are made available following the submission of Social Climate Plans by the Member States
  • 4. Overall EU emissions, reduction goals and coverage of ETS FSR Conference | 02/12/2022 4 Source: Oeko-Institut 2022 • ETS-2 set to cover > 50% of ESR emissions (remainder mainly agriculture) • Reduction of -43% vs 2005 levels by 2030 envisaged -500 500 1 500 2 500 3 500 4 500 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 GHG emissions [Mt CO 2 eq.] Extra-EU navigation Extra-EU aviation Intra-EU navigation Intra-EU aviation Domestic aviation ESR without ETS 2 ETS 2 ETS stationary ETS- Industry ETS - Energy industries LULUCF ESR ETS stationary ETS 2 ETS stat: -62% vs 2005 ESR: -40% vs 2005 ETS 2: -43% vs 2005 LULUCF = -225 Mt CO2 eq Total: -55% vs 1990
  • 5. Projected price paths under the ETS 2 FSR Conference | 02/12/2022 6 Source: Oeko-Institut (2022): https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf • Price projections vary • 50 – 140 EUR/t CO2 (and more) possible in 2030 • Market is set to be separate from the ETS-1 •
  • 6. ETS-2 and SCF in the ongoing trialogue discussions FSR Conference | 02/12/2022 7 COM EP Council Scope All fossil fuels not covered by EU ETS in transport and buildings All fossil fuels not covered by the EU ETS Private households only phased in after a review in 2029 (conditional on level of fuel prices and SCF operation) Like COM Possible opt-out for MS until 2030 with national carbon price > EU price Start 2026 (MRV from 2025) 2025 (MRV from 2024) only commercial 2027 (MRV from 2024) Size of SCF 72 billion EUR 72 billion EUR (+150 mln allowances) and adjustment for rising prices 59 billion EUR (+150 mln allowances) Ceiling price 50 EUR/tCO2 (reviewed in 2029) + limiting cost pass-through to 50% max Excessive price control If doubling of price within 6 months If price increases 1.5 times within six months
  • 7. Impacts across Member States and households
  • 8. ● Large difference in income levels ‒ across MS and ‒ across income groups ● Income for lowest income group in D/FR/BE/DE… is higher than for highest income group in RO/BG/HU FSR Conference | 02/12/2022 Mean net equivalent income per year across Member States and income quintiles 9 Source: Oeko-Institut (2022): https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf
  • 9. Impacts determined by incomes and CO2 intensity FSR Conference | 02/12/2022 10 Source: Eurostat - Air emissions accounts by NACE Rev. 2 activity [env_ac_ainah_r2], Eurostat - Distribution of income by quantiles - EU-SILC and ECHP surveys [ilc_di01]; Mean and median income by household type - EU-SILC and ECHP surveys [ILC_DI04] • Impacts will be higher for MS with • Lower incomes • Higher CO2 intensity in buildings and road transport BE BG CZ DK DE EE IE EL ES FR HR IT CY LV LT LU HU MT NL AT PL PT RO SI SK FI SE 0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Household income per year CO2 emissions in buildings and road transport per capita per year
  • 10. ● Households in lower income Member States more affected ● Fossil fuel intensity of the heating system and structure of transport system play a large role in determining impact FSR Conference | 02/12/2022 Share of CO2 costs in total household consumption expenditure (CO2 price at 50 euro/t CO2) 11 Source: Oeko-Institut (2022): https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf
  • 11. ● Impact regressive in all Member States ● (Not necessarily the case for transport where car ownership plays a large role) FSR Conference | 02/12/2022 Share of CO2 costs for heating in total household consumption expenditure by income quintile (CO2 price at 50 euro/t CO2) 12 Source: Oeko-Institut (2022): https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf
  • 12. Who should be supported by the SCF?
  • 13. From COM proposal for a Social Climate Fund (SCF): FSR Conference | 02/12/2022 14 • ‘vulnerable households’ means households in energy poverty or households, including lower middle-income ones, that are significantly affected by the price impacts of the inclusion of buildings into the scope of Directive 2003/87/EC and lack the means to renovate the building they occupy; • ‘vulnerable transport users’ means transport users, including from lower-middle- income households, that are significantly affected by the price impacts of the inclusion of road transport into the scope of Directive 2003/87/EC and lack the means to purchase zero- and low-emission vehicles or to switch to alternative sustainable modes of transport, including pub-lic transport, particularly in rural and remote areas. → Concept of vulnerability and providing targeted support
  • 14. A selection of vulnerability indicators for expenditures on energy and heat FSR Conference | 02/12/2022 15 Source: Own calculation based on the EU HBS data, year 2015, for the 10% threshold indicator and the LIHC indicator and based on the EU SILC data, year 2019, for the indicator looking at the inability to keep the home warm and the indicator looking at arrears on utility bills; HBS data missing for Italy and Austria; Vulnerability displayed as share of persons in total population. • Many different vulnerability indicators availalbe • All measuring different aspects of vulnerability • More vulnerable HH in lower income MS, especially for expenditure- based indicators 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% 40,0% 45,0% RO BG HU HR PL SK LT LV EL CZ PT EE SI MT ES CY IT BE FR DE NL FI SE AT IE DK LU below 60% of median above 60% of median percentage of total population of average net equivalent income in MS Energy/Heat 10% threshold LIHC inability to keep home warm arrears on utility bills
  • 15. Income as a driver of vulnerability in the heating sector FSR Conference | 02/12/2022 16 Source: Own calculation based on the EU HBS data, year 2015, for the 10% threshold indicator and the LIHC indicator and based on the EU SILC data, year 2019, for the indicator looking at the inability to keep the home warm and the indicator looking at arrears on utility bills; HBS data missing for Italy and Austria; Vulnerability displayed as share of persons in total population. • In all MS, lowest income deciles most prominent amongst those vulnerable in energy/heat • (Other factors play a role, e.g. location for mobility) 17,7% 19,4% 18,2% 21,9% 19,5% 14,5% 15,9%16,3% 21,2% 8,6% 18,3% 14,2% 15,2% 14,6% 21,4% 13,5% 13,5% 16,1% 15,5% 13,5% 5,6% 9,5% 16,0% 12,7% 21,2% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% RO BG HU HR PL SK LT LV EL CZ PT EE SI MT ES CY IT BE FR DE NL FI SE AT IE DK LU below 60% of median above 60% of median percentage of total population of average net equivalent income in MS Energy/Heat 1st decile 2nd decile 3rd decile 4th decile 5th decile 6th decile 7th decile 8th decile 9th decile 10th decile
  • 16. What should support from the SCF look like?
  • 17. FSR Conference | 02/12/2022 18 Adelphi, CSD, Öko-Institut, WISE (2022): https://www.oeko.de/fileadmin/oekodoc/EUKI- Policy-Brief-Supporting-Households-in-the-Energy-Price-Crisis.pdf
  • 18. From COM proposal for a Social Climate Fund (SCF): FSR Conference | 02/12/2022 19 The Plan shall include national projects to: (a) finance measures and investments to increase energy efficiency of buildings, to implement energy efficiency improvement measures, to carry out building renovation, and to decarbonise heating and cooling of buildings, including the integration of energy production from renewable energy sources; (b) finance measures and investments to increase the uptake of zero- and low- emission mobility and transport. → Focus on reducing energy consumption and increasing energy efficiency (direct financial support only as a temporary measure)
  • 19. Using the SCF to exchange fossil heating systems to heat pumps for the most vulnerable FSR Conference | 02/12/2022 20 Source: Oeko-Institut (2022): https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf ● SCF sufficient to switch to heat pumps for all vulnerable households in lower income MS ‒ Even with very high exchange rate of heating system (7% p.a.) ● Additional funding by MS would increase available funds ● Investment in building insulation and measurs in transport sector not considered ‒ Would increase support needs
  • 20. Conclusions FSR Conference | 02/12/2022 21 • Proposed ETS-2 has a considerable level of ambition • Projected price paths show a broad range and high prices are a concern for many MS • Low-income / vulnerable households and MS most affected by high CO2 prices • BUT: Lots of possibilities for redistributing revenues and making the system progressive • Definition of who is vulnerable: Many possibilities! Some indications from the COM, the EP, EPOV and various other sources • SCF can go a long way in protecting vulnerable households • Targeting is key • Focus on reduction of consumption (renewables, efficiency, modal split) is key • Future challenges: Define vulnerable households, design the appropriate support programs, monitor efficient outcomes
  • 21. Thank you for your kind attention Projects cited in this presentation: • Oeko-Institut (2022) The Social Climate Fund – Opportunities and Challenges for the buildings sector https://www.oeko.de/fileadmin/oekodoc/ECF_Social_Climate_Fund.pdf • Adelphi, CSD, Oeko-Institut, WISE (2022) Facilitating Just Carbon Pricing in Central and Eastern Europe (ongoing) Policy Brief: https://www.oeko.de/fileadmin/oekodoc/EUKI-Policy-Brief- Supporting-Households-in-the-Energy-Price-Crisis.pdf Policy Report: forthcoming