Europe Daily Bulletin No. 12789

14 September 2021
SECTORAL POLICIES / Climate interview
Should the EU create a European carbon market for road transport and buildings? Interview with Andreas Graf and Thomas Pellerin-Carlin
Brussels, 13/09/2021 (Agence Europe)

The creation of a second European Union emissions trading system (ETS2) covering emissions from road transport and the heating of buildings – a flagship proposal of the legislative package for the climate presented by the European Commission in July of this year (see EUROPE 12762/1) – has come in for scathing criticism from several quarters, including certain members of the European Parliament. With the latter preparing to debate it on Tuesday 14 September, along with the entire climate package, Agence Europe talked to Andreas Graf, project leader for EU energy policy for the think-tank Agora Energiewende and Thomas Pellerin-Carlin, Director of the Energy Centre of the Institut Jacques Delors, to weigh up the pros and cons [interview by Damien Genicot]. 

Agence Europe – Andreas, why are you are in favour of a new ETS?

Andreas Graf – Because we need to make pollution more expensive. At Agora Energiewende, we believe that a carbon price is an incredible opportunity to really move forward at EU level by having climate reflected in businesses’ and households’ day-to-day investment decisions: when they choose a car or when they decide how deeply to invest in their buildings, for instance.

However, we are not in favour of an ETS2 as a stand-alone measure. It needs to be part of a broader policy mix.

Won't the ETS2 have a limited impact on emissions due to price inelasticity?

AG –Price inelasticity essentially means that you do not change your behaviour much based on the increasing price signal in the short term.

It is true that people do not change their boiler or their car every day. Nonetheless, if we can give a credible signal to consumers that fuels will get more expensive to use over time, then the price signal will have an impact. It won’t be overnight, but eventually people will think twice before making certain investments and lifestyle decisions.

In your view, Thomas, the Commission is taking huge political risks for small climate gains. 

Thomas Pellerin-Carlin – I want to stress that my position does not concern the principle of adopting this. Putting a price on carbon is not a bad idea per se. 

However, the ETS2 would mean much pain, little gain. I think it is essential to think about which sectors should be concerned; how big the price increase should be; what the accompanying measures are; political acceptability and timescale.

 For instance, I am all in favour of broad ETS reform that would increase the carbon price for industry, because that sends a clear price signal to organisations that have the capacity and resources to integrate the price in their decisions.

But this is not the case for individuals. We are not homo economicus. In real life, none of us is good at calculating. Therefore, when you put a carbon price on fossil fuels used for road transport and building heating, the reaction to the price is far more limited. It is the reason why there are few potential gains .

The flip side of the story is the political pain from this. In France, we had the Yellow Vests. We have seen how a modest increase in the carbon price, badly orchestrated, by a President who was unpopular in 2018, led to political disaster.

The Commission is also tabling a new Social Climate Fund to address any social impacts arising from the ETS2. It would be financed partly by the EU budget, using an amount equivalent to 25% of the expected revenues of the ETS2. Is that not enough?

TPC – It is crystal clear that 25% won’t be enough. The only way to make such proposal acceptable would be to recycle 100% of the revenues.

AG – I agree. Moreover, I think that Member States should decide how to recycle these revenues for the right purposes.

TPC – As far as the remaining 75% is concerned, we do not know yet what the Commission is going to do with it because we are still waiting for its proposal on the own resources. It should have been published on 14 July, but the Commission postponed it. I know that some people in the Commission and elsewhere want to use some of the ETS revenues to pay back the NextGenerationEU debt. To me, this would be a huge political mistake.

Andreas, do you sympathise with Thomas’s criticism of the Commission’s proposal?

AG – I have a slightly different view from Thomas. I want to emphasise again that our support for a price on carbon assumes a broader package of measures, such as CO2 standards which will bring cleaner cars onto the market. It is next to national governments taking clear actions to support households and innovations by giving them financial support to face the transition.

What we saw in France was not just a reaction to a rising price. It was a reaction to a rising price with the sense that they (the Yellow Vests) were not given the opportunity to adequately respond to that changing environment. 

Therefore, I do think the timeframe is an important part of the conversation. Why? Because the price on carbon at EU level we are discussing would not actually be felt by households until 2026. My emphasis is therefore: let’s talk about the things national governments need to do in the next five years while the price is zero, so that we do not end up with unrest.

Instead of talking about how the ETS2 is going to be a problem, we should be talking about why governments are not doing enough to make sure it isn't a problem.

TPC – As regards the Yellow Vests, I cannot emphasise enough the extent to which the carbon tax was badly managed by the French government. Part of the story is specific to the Yellow Vests crisis. However, France also experienced trouble in 2014 with the rise of the so-called red hats that forced the government to abandon the ecotax. This shows that the issue of energy prices is a potential powder-keg.

Moreover, as I said, the impact on the climate will be limited. Andreas said that the ETS2 would give a price signal when “they” choose a car or when “they” decide how to invest. But this “they” are essentially the upper-middle-class people who can afford to spend 30,000 euros on an EV (electric vehicle) or to renovate their house. They are a minority of the people in most Member States.

What do you think, Andreas, about this argument about the limited impact of the measure because of the unaffordable price of alternatives? 

A.G – The reality is that we have a fast-evolving EVs market and a situation in which many of the possible investment decisions for buildings are cost-effective.

For EVs, there are cars on the market today that are quite affordable: roughly 10,000 euros with government incentives.

There are currently two key challenges for these new models.

First, their range is relatively limited. However, it is still over 100 km or 200 km (depending on the model), which is enough to meet the basic mobility needs of most households.

The second challenge is production. We are still not making enough of them.

In my view, the question is not about the cost but: “do we have enough of those cars on the market?”

And the second question is: “Are governments doing enough to force car manufacturers to put as many EVs on the market as possible so that we have a significant second-hand car market in the future?”

Instead of talking about affordability, we should be talking about how we could scale up our manufacturing capacity and how Member States should support households. Currently, governments do most to support wealthy households. This needs to change.

TPC – For me, the problem is that Andreas is investing his entire faith in the success of the EU policy in the inclination of 27 national governments to do something that none of them has been doing in the past decades. If the EU and the national government fail to implement this ETS2 in a socially fair manner, the EU will be blamed even if the responsibility lies predominantly with the national governments.

In my view, the two main drivers to reduce emissions from cars and buildings are EU regulations: the CO2 standards for cars and vans, and the ‘energy performance of buildings directive’ (EPBD). While I think the ETS is much pain, little gain, I think that both CO2 standards and EPBD are medium pain with considerable gain.

For instance, introducing a mandatory minimum energy performance standard inside the EPBD would oblige all homeowners to renovate their home before they sell it or rent it. That would be a game changer. There would be opposition from many homeowners obviously, but you are less likely to have millions of people in the streets.

Moreover, the gains of regulatory measures are almost certain, whereas we have no way of knowing whether the price of the ETS2 will be effective. 

Finally, this kind of regulation is politically entrenched, which is super important when it comes to climate policy. It is very rare to see the EU rolling back a regulation that it has passed. One of the reasons is that once the regulation is passed, all the market players adapt to it.

As regards the ETS2, even if it were adopted, it could be rolled back after the 2024 elections or if there is a massive popular backlash in one or several Member States.

Andreas, do you support the measures Thomas has just mentioned?

AG – I am also for minimum energy performance standards and strengthening the CO2 standards. Thomas and I are also both in favour of phasing out the installation of new gas boilers by 2025.

However, I do also believe that a carbon price will help to accelerate things. It will provide more revenues, but it also sends out that additional signal to those who are maybe not covered by those other incentives we are providing with regulatory measures.

Maybe I have slightly less faith than Thomas in the minimum energy performance standard achieving it on its own, even though I support this measure.

TPC – People who want weaker CO2 standards are using ETS2 to say: “You don’t need to put that much pressure on companies because carbon pricing will do the trick”. In July, the Commission decided to stand firm on the ETS2 and to back down on its 2030 ambition for CO2 standards... (see EUROPE 12760/112762/3)

With the exception of the ETS2, you seem to agree on many things.

TPC – I think I understand now what the main difference between Andreas and me is. I have far less trust in the competence and strategic planning capacity of national governments than Andreas has. Their decisions are mostly oriented towards the short term. I don’t really see how and why it would change in just a few years.

Besides, the European Commission can’t really hold national governments accountable over the respect of national decisions. For instance, the NECPs won't get us to the old EU 2030 target, but the capacity of the Commission to change that is very limited.

AG – Maybe I am optimistic. If the European Green Deal is a generational moment, then it is all-in and you must have some hope, some faith and maybe some naiveté. I think there is no other way to meet the EU climate targets than to have some faith, or at least some demands for the strategic capacity of governments. I have more faith that we can make clear to governments that circumstances have changed and the demands of citizens are different.