The use of auctioning revenues from the EU ETS for climate action
This study analyses the reporting on the use of auctioning revenues since 2013 and investigates how countries earmark their revenues and if those revenues finance additional climate action. For this purpose, we selected eight countries as case studies, namely Czechia, Germany, Greece, France, Italy, the Netherlands, Poland, and Portugal. The analysis is mainly based on the reporting of Member States to the European Commission, desk research on legal documents and interviews with relevant experts from ministries and NGOs.
The EU has agreed to reach climate neutrality by 2050 and enshrined this objective in the European Climate Law (ECL). Achieving this objective necessitates a transformation of the EU economies which requires significant additional investments across all sectors (COM 2018).
One key source of climate financing could come from the auctioning revenues of the EU Emissions Trading System (EU ETS). The EU ETS generated EUR 16.5 billion of revenues in 2020 and EUR 14 billion in the first half of 2021 alone (COM 2021a). These revenues are expected to further increase due to a reduction of overall emission allowances, leading to a rising carbon price as well as the phasing out of free allocation (Wiese et al. 2020, Lemmens and Mertens 2022).
- All revenues should be spent on climate action. The EU ETS Directive must establish 100% earmarking, exclude fossil fuels and compensation payments, and
improve reporting standards. External checks should safeguard spending of revenues on climate action.
- Not all auctioning revenues reported to be spent on climate action incentivise green investment. Countries spent part of their revenues on support for fossil fuels, in particular new gas boilers through building retrofitting programmes. Other countries include energy price compensation for industry in their reporting.
- Reporting has significant shortcomings. Submitted reports do not provide a good description of the financed actions as they are missing important contextual information and often include inaccuracies.
- National policy design must ensure traceable long term funding. Countries should dedicate the revenues to a limited number of institutions and actions. Ideally, more revenues go to the Modernisation Fund thereby ensuring a transparent use of revenues.