This online workshop organised by Life ETX partner ZERO discussed national implementation of the latest revision of the EU ETS. Debate centred around how to increase the climate ambition of the Modernisation Fund, the EU programme targeted on updating the energy systems of lower income member states, how to boost its budget (€48 billion between 2021-2030) and extend its scope to include Portugal, Greece and Slovenia. 

Secondly, an exchange of views was had on maximising the climate and social benefit of the ETS2 and the complementary Social Climate Fund (SCF), which when introduced in 2027 will introduce carbon pricing for fuel use within buildings and transport.

What is the Modernisation Fund?

Morgan Henley, EU Heating Sector Decarbonisation Campaigner at Bankwatch, explained how the Modernisation Fund works in practice.  Established to help EU member states with a GDP per capita 60% below the EU average, the Modernisation Fund invests in modernising their energy systems and reducing greenhouse gas emission outputs to support the transition to a low-carbon economy. 

Funds are sourced from auctioning a portion of allowances within the EU ETS, generating an estimated €48 billion between 2021 and 2030. This ensures that the funds are generated directly from polluting industries and are reinvested into sustainable development projects. The allocation of funds is based on a formula that considers a country’s GDP per capita, level of industrialisation, and emissions intensity.

Henley stated that the use of revenue from the ETS presents a unique opportunity to create co-benefits from carbon pricing. Mobilising the Modernisation Fund can play a vital role in not only reducing dependency on fossil fuels, but also neutralising potential negative social impacts. 

Despite its beneficial effects, the Modernisation Fund is lacking  in transparency and is being used to continue counter productive investment in fossil fuel infrastructure. Persistent loopholes mean that despite the climate emergency, fossil fuel investment persists in Poland and Romania as uncovered by Bankwatch. These projects typically concentrate on coal-to-gas conversions for combined heat and power stations but also for a gas pipeline in Romania, power plants, and industrial uses. Switching from coal to gas is to replace one polluting fuel with another. With the climate crisis escalating dramatically, EU funds should contribute to climate action, not undermine it. 

These installations are built to operate for the next 30-40 years, well beyond the EU’s commitment to climate neutrality. Any fossil gas project enabled by EU funds comes at the expense of desperately needed investments in renewable energy and energy efficiency. If we have any hope of not crossing the 1.5 degree warming threshold this simply cannot happen. 

As we await the next disbursement period of the Modernisation Fund, there are several problems to resolve. Firstly, transparency and public participation remain paramount in ensuring the effective utilisation of the funds. Robust transparency mechanisms should be established to provide clear insight into the allocation and implementation of projects backed by the Modernisation Fund. Additionally,decision-making processes regarding project selection and implementation should include the public to enhance accountability.

By addressing these concerns, the Modernisation Fund will become better suited to supporting the transition to a low-carbon economy and fostering sustainable development in lower-income EU member states.

The Social Climate Fund

The following speaker, Eleanor Scott, expert on EU carbon markets at Carbon Market Watch, addressed the ETS2 and the Social Climate Fund (SCF). 

The ETS2 will be introduced in 2027 to combat emissions in buildings and road transport, which have been stubborn to reduce. This means that 75% of the EU’s emissions will then be covered by carbon pricing. The ETS2 will apply a price to the fuel used in vehicles, and heating and cooling of homes and buildings. This will send a market signal to accelerate investment in a reduction of fossil fuel usage and a switch to renewable energy. 

Therefore it is vital that member states introduce complementary policies to reduce the impact of the ETS2 price on the public. As this price is levied equally across all member states, the price will be regressive. This is the role of the SCF. It applies complementary policies that  prioritise access to support for lower income groups as fossil fuel dependency lowers and to alleviate energy poverty.The SCF is valued at EUR 86.7 billion, including member state co-financing of 25%, and is the EU’s first instrument to specifically address the needs of vulnerable households, transport users and micro-enterprises in the energy transition. The SCF can be used for targeted measures and investments such as energy saving renovations, decarbonisation of heating and cooling, and low/zero carbon vehicles; temporary income support for ETS2 price, by direct transfers or energy tax reduction; and technical assistance.

However, according to estimations, the SCF is too limited for  the investment needed to fully address energy poverty in the EU, never mind decarbonising the transport and building sectors. 

Prudent spending of wider ETS2 revenue, estimated at €260 billion between 2027-2032 (considering a price per tonne of 45 EUR), will be an essential element to unlocking the climate and social benefit of the expanded carbon pricing system. 

As a result of the latest ETS revision all ETS revenue is assigned for spending on climate action. However, vague definitions of climate action within the legislative text and a lack of transparent reporting means that member states can spend this revenue largely unchecked. As we are currently faced with an investment gap of €240 billion to decarbonise buildings and transport (European Commission, 2022) the ETS2 revenue can provide a solution to targeting necessary investment in cleaner transport, warmer homes and a resilient renewable energy system.

An essential element of each member state’s National Social Climate Plans (NSCPs) is to identify vulnerable groups that will receive support. Each member state formulates this differently based on factors such as home ownership rates, rural population, fuel use practices and the most accurate indicators of energy poverty. Civil society will have a strong role in scrutinising that NSCPs are providing targeted support to those most in need. 

Another challenge is to create a balanced policy mix between adequately supporting policies that reduce carbon dioxide (CO2) emissions and those that maintain or enhance societal welfare. Support measures need to look beyond income support (some of which will be needed) to ensure that lower income groups have access to home renovations and renewable energy. This will avoid a two tier transition in which only the wealthy have access to emission reductions. Examples of schemes which maximise both climate and social benefit were highlighted such as ‘Gent Knapt Op’ in Belgium which provides lower income groups with grants up to EUR 30,000 for renovation, which is recouped when the house is sold.

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