A plea to use revenues generated by EU ETS for a socially compatible transition to a low-carbon economy

The EU institutions are currently in the process of reviewing their emission trading system (EU ETS), a climate change mitigation measure adopted in 2003. It has put a ‘cap’ on the CO2 emissions of the installations covered, which shrinks every year, and, by allowing emission allowances to be traded, aims to reduce emissions in a cost-effective way. The current (third) phase aims to reach a target of 21% GHG reduction by 2020 compared to 2005, while the next phase (2021-2030) aims to cut covered emissions by 43% compared to 2005.

It is the revision in light of this next (fourth) phase that is currently being discussed by the European Commission, Parliament and Council in the so called ‘Trilogue’ meetings. A number of issues need to be tackled in order to ensure the effectiveness of the ETS, including the historical surplus of allowances, overlap with other mitigation policies, carbon leakage provisions and the lack of stability and predictability in the system. While discussing this cycle of reform, including the implications of different options currently lying on the table, is definitely necessary, this contribution takes a more targeted perspective and aims to discuss the potential role of the EU ETS in addressing the short and medium-term negative socio-economic effects associated with the transition to a low-carbon society and economy.

While fully recognizing the need for this transition, which will only prove to be beneficial for the environment, society, people’s health and the economy, especially on the long term, transitions can be difficult, and will inherently have both winners and losers, at least in the short to medium term. While this should in no need be a reason to decrease our ambition, these negative effects should be managed to the best of our capabilities.

Such negative effects will mostly be concentrated in sectors which are inherently carbon-intensive, and in regions were these sectors are the backbone of the regional economy. Indeed, employees could lose their jobs and whole populations could see their economic and social wellbeing decline. These so called negative impacts associated with the transition have so far, to a large extend, been avoided in the EU thanks to protection offered to carbon intensive industries in the form of free allowances and, to some degree, indirect cost compensation. Regardless of the fact that the execution of this protection was flawed, the reasoning was grounded: while the EU was one of the frontrunners in climate mitigation policies, many other countries lagged behind, causing a competitive disadvantage for European companies. Indeed, the asymmetrical nature of climate change mitigation policies could, when not addressed, shift production and investment to countries with less stringent climate change policies, thus causing no real emission reduction, a phenomenon called carbon leakage.

Under the emerging climate change regime of the Paris Agreement, this asymmetry will gradually disappear when parties increase their efforts and ambitions to combat climate change, thus effectively eliminating this ‘rationale’ to offer protection. Sectors that fail to decarbonise will eventually have to disappear, negatively impacting its workers as well as regions whose economies are structured around those sectors. Managing these negative impacts will require a lot of investments: workers will have to be retrained, local economies diversified, and social policies need to be set up to support people affected in these transition periods. This is where the EU ETS could, and should, play an important role.

Historically, such transitions have often been funded by public resources, ultimately paid by taxpayers. However, this can be seen as unfair, since the ‘polluter pays’-principle should apply to the issues associated with the transition as well. The EU ETS is already based on this principle: the more carbon-intensive a sector or company is, the more allowances it needs to meet the requirements, thus they are required to buy more allowances on the market compared to smaller emitters. Companies that can decarbonise relatively cheaper will tend to do this and sell surplus allowances to the carbon-intensive sectors, indirectly making them ‘pay’ for the decarbonisation.

One could argue that this principle can be taken one step further: the negative effects associated with the transition towards a low-carbon society and economy are arising because of the historical legacy of big emitters, thus these emitters should also pay the costs associated with the transition.

Currently, about 57% of the allowances in the EU ETS are auctioned to the benefit of the member states, and they can use the revenues however they see fit. While the directive for EU ETS does urge member states to use these revenues to tackle climate change, both in the EU and third countries, no reference is made to address the negative effects associated with the transition, and it is often unclear how revenues are actually being used by member states.

The current reform process would have been the ideal moment to introduce robust measures to direct revenues generated from the EU ETS to finance policies which aim to address the negative effects associated with the transition. To some extent, both the Council and Parliament acknowledge the need for this. The Council position included that “member states should also use auction revenues to promote skill formation and reallocation of labour affected by the transition of jobs in a decarbonising economy.” The Parliament went further: next to including a similar provision, it proposed in its position to create a ‘Just transition fund’. This centralised fund, using 2% of the auction revenues, would be used to “support regions which combine a high share of workers in carbon-dependent sectors and a GDP per capita well below the Union average.” While it can be questioned if the amount foreseen for this fund would be sufficient, it won’t, the fact that it was introduced can be seen as a big step in the right direction.

However, as the trilogue meetings are nearing their end, it is becoming increasingly clear that establishing this just transition fund is a ‘no-go’ for the Council, and thus for the member states. A reason for this might be that some member states will be less affected in a negative way than others by the transition, thus making them reluctant to ‘pay the bill’ for others. This would be a lack of fundamental solidarity, a key element for successfully tackling climate change and the challenges it brings with it, and an element that is currently often missing in EU politics.

If such a fund does not get included in the final directive, we will most likely have to wait for the next review cycle, which will take at least another 10 years. In an ideal world, I would plea to the EU to create such a fund to address the negative effects associated with the transition, and to go further than the Parliament proposal to use only 2% of revenues to address this challenge. However, the world is often not ideal, and as the review cycle is nearing its final stage, we will most likely have to look at other sources to address this imminent challenge.

Domien Vangenechten (Belgium)


Domien obtained MsC in Sustainability Science and Policy as well as MsC in International Relations and Economic Policy. Domien is Founding Member and part of Quality Assurance at GW. In his professional life, he is currently working on topics such as carbon pricing and trade mechanisms and how to manage the transition to a low-carbon society. Within GW, his focus and interests lie in SDG 8, 10 and 13.