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

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
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
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
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

Impacts determined by incomes and CO2 intensity
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
Share of CO2 costs in total household consumption expenditure
(CO2 price at 50 euro/t CO2)
11

● Impact regressive
in all Member
States
● (Not necessarily
the case for
transport where
car ownership
plays a large
role)
Share of CO2 costs for heating in total household consumption
expenditure by income quintile (CO2 price at 50 euro/t CO2)
12

Who should be supported by the SCF?

From COM proposal for a Social Climate Fund (SCF):
• ‘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
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
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?

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):
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
● 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
• 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
• 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

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

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