The European Union’s energy and climate agenda is navigating choppy waters of late. Some interesting ideas meant to help smooth that passage have been suggested and are worth following.
High energy prices and fears about losing jobs to more competitive parts of the world have undermined the EU’s Green Deal agenda lately, so much so that nobody really even calls it the Green Deal anymore.
It has driven the EU institutions to pursue a simplification agenda, deregulation by another name, and has cast many parts of the sustainability jigsaw puzzle into damaging uncertainty.
That is why such a fuss has been kicked up over the last couple of months about efforts to scale back the level of green reporting that companies must do. National governments are also lobbying hard to water down clean mobility targets.
In some cases, it is fear of the new that is causing governments and policymakers to get cold feet. Some policies are just upgraded versions of laws that have been in place for years, while others are fresh off the legislative production line.
One of those policies is a new carbon market for buildings and road transport. Currently, those two sectors are not covered by the full-fat emissions trading system (ETS), which places a market-dictated price on each tonne of carbon emitted within the EU.
Exposing buildings and road transport to carbon pricing is an unavoidable policy step, as initiatives like energy efficiency upgrades and zero-emission cars rollout will only happen at the scale needed if there is a powerful enough signal.
This new ETS2 is due to come into force in 2027 but has triggered concerns particularly in Central and Eastern Europe about the financial burden that will be placed on households.
It is a legitimate fear during an era of high energy prices and inflation, but recent calls from some of those governments to delay ETS2 or even cancel it altogether really failed to take a long-term view of what the policy is meant to achieve.
That is why this week the European Commission did not cave to that particular pressure but did heed other calls to make changes to ETS2 now, so that it can debut on a surer footing in just over one year’s time.
Pending legislative approval, the Commission will fiddle with the mechanism that releases carbon permits onto the market. The idea of this is to make sure that the price per tonne does not go too high. Anything over €45 will trigger this extra flexibility.
Environmental groups do not like this and have arguably rightfully pointed out that placing this kind of restriction on ETS2 turns it into more of a tax than a market-based measure.
That aside though, the best idea that the Commission has decided to listen to is regarding the revenues that will be generated by ETS2 when emitters buy carbon permits. Profits from those sales will be used to pay for projects like building insulation, for example.
But as things stand, the market will have to be up and running for that money to be spent. Not if a new proposal is supported though, which will allow governments to borrow those revenues before they are actually generated.
That way, countries can potentially pay for decarbonisation measures before the carbon is actually emitted.
ETS2 could well be the litmus test for the EU’s green agenda over the next decade, so making sure it is a success should be high up the priority list of policymakers.
EU-UK power play
Another brand new policy is the carbon border adjustment mechanism (CBAM), which will charge importers of goods like steel, aluminium and cement if those products do not meet certain green criteria.
The idea is to incentivise EU industry to decarbonise without worrying about being undercut by companies from outside the bloc, as well as encouraging non-EU manufacturers to also go green as well.
Electricity trades will also be included in CBAM’s remit. In the Western Balkans, this is bad news because of the interlinked nature of the mainland European grid and the fact that most of those countries still rely on polluting sources of energy.
On the other side of the continent, across the Channel, the United Kingdom is also in a particularly difficult bind, as a large part of the business case of the several power interconnectors relies on cross-border trading.
CBAM will interfere with that and could scare away investments in more subsea links and other infrastructure needed to build out clean energy in the North Sea.
That is why Europe’s wind industry urged the Commission this week to grant the UK electricity sector an exemption from CBAM for the time being. The logic is rather simple as it is looking to buy the Brits time while separate talks progress.
Those negotiations are looking into linking the EU’s ETS with the UK carbon market, which was set up after Brexit. According to CBAM’s rules, levies should not be imposed on goods that have already been subject to carbon pricing.
That is why Switzerland will be exempt, as its ETS is indeed linked to the EU’s. But there’s a problem, as those EU-UK talks are not making much progress and will certainly not be wrapped up by the time CBAM is activated on 1 January 2026.
Hopefully, Brussels will be open to the idea in the same way that it was open to the ETS2 idea. Making logical changes in the present to avoid long-term pain really is a no-brainer.
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