A just energy transition vs rising inequality
A just energy transition vs rising inequality. Image: melpomen © 123RF.com

At the heart of the European Green Deal is the goal of a carbon free Europe by 2050. Yet, achieving this lofty goal is not going to be without some pain and effort over the course of the next three decades.

Eurelectric, Guidehouse and Cambridge Econometrics, with scientific contribution from the ENEL Foundation, released the study E-quality: Shaping an inclusive energy transition, which sets out how climate policies are likely to impact low-income populations harder in the short term unless they are accompanied by targeted mitigating measures.

This article was originally published in Smart Energy International Issue 5-2020.
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It also outlines several remedial solutions that could be considered to cushion the effects on vulnerable households while ensuring sustainable growth for the benefit of all.

It is important for policymakers to better understand how climate policies will affect different sections of the economy and provide them with the tools to ensure that the goal of decarbonisation is fair and equitable.

Speaking during a recent meeting, Magnus Hall, president of Eurelectric told attendees that as more and more services are electrified, the sector must prioritise the decarbonisation of electricity. He called for a ‘just’ transition, saying: “We also need to make sure that we help consumers to go through this change with hope for the future.”

IT IS IMPORTANT FOR POLICYMAKERS TO BETTER UNDERSTAND HOW CLIMATE POLICIES WILL AFFECT DIFFERENT SECTIONS OF THE ECONOMY AND PROVIDE THEM WITH THE TOOLS TO ENSURE THAT THE GOAL OF DECARBONISATION IS FAIR AND EQUITABLE.

Hall continued: “We have a big political debate in Europe right now around recovery packages where we are looking to combine recovery with a strong green policy. At the same time, we want to limit the effects on vulnerable households.

“If we will succeed in our policies, we have to succeed for all of them – we have to make it very broad. Our members are very keen to understand how these diverse households and their diverse budgets are actually being impacted by decarbonisation policies and even more importantly, how can we act to avoid the negative effects?”

Creating inequalities

Kadri Simson, energy commissioner at the European Commission, further told attendees: “We know that some policies might entail a risk of creating inequalities. These risks need to be managed in the Commission. It is our responsibility to make sure that new ambitions didn’t come at the cost of people but that they actively monitored to combat inequality across Europe.

“We are discussing how our existing and new policies can ensure that no one is disproportionately affected and least of all – left behind. Already we have a number of initiatives that are pushing us in this direction.

“First, the Clean Energy for All Europeans legislative package. This is unprecedented in its commitment to empower consumers and protect vulnerable customers in order to prevent inequalities, lower the cost for every person by promoting competitive electricity prices and encourage a competitive electricity market to deliver the best price and energy efficiency.”

Simson continued: “The National Energy Climate plans and the long-term renovation strategies reinforce both decarbonisation and recovery. These plans and strategies are directly linked to the open semester just transition plans under them as drivers of transition. Today these plans reinforce each other and determine the targets of national recovery and resilience plans under the next generation EU.”

By way of highlighting the EU commitment to a just and fair transition, Simson said that the Commission has proposed strengthening the just transition fund to €40 billion. She added that the mechanism would be central to enabling more diversified and decentralised European economies and in supporting local communities.

She also revealed the Commission will launch a European climate pact, “which aims at engaging citizens in the transition by linking them with decision-making at all government levels and improving their knowledge of energy and climate can empower them”.

It is important for policymakers to better understand how climate policies will affect different sections of the economy. Image: Natthapong Khromkrathok © 123RF.com

“In all these efforts our focus must indeed be on people and households to understand the impact of policies on family’s budgets. The pandemic has made us realise how vulnerable we are as a society. We shall keep this in mind as we work towards the clean energy transition. We have to work with the people, and for the people.”

And she stressed that “if I could leave you with one message, it is this: by investing in future oriented sectors such as clean energy, efficiency and the circular economy we’re building a more sustainable resilient economy but equipped to face future shocks. We must commit to doing this by putting households and ultimately each and every one of our citizens first.”

Positive and negative effects

According to the report there will be both “progressive and regressive effects. Some policies will result in lower-income households financially benefiting more than other income groups (progressive effect), while others will result in lower income households being disproportionately burdened by costs (regressive effect).”

These interventions include things such as energy taxes (regressive), or increased energy efficiency measures (progressive). The idea is to work to outweigh the regressive policies with progressive policies.

Carlo Papa, managing director, ENEL Foundation, spoke about some of the mitigation strategies identified in the study. These include:

Lump sum transfers or equivalent tax relief measures.

This option would see “an average sum of €260 going to households across the EU every year” representing a “4.2% increase in household disposable income for the lowest-income households and an 0.8% increase for the highest-income households.”

Targeted energy efficiency measures.

Energy efficiency obligation schemes and subsidies must be leveraged to direct more funds to low-income households. Upfront subsidies will help with the overall investment costs. Annual funding required across the EU is estimated at around €1-3 billion per annum for the EU as a whole.

Job re-training programmes, focused on industrial sectors impacted by decarbonisation.

Shifts to a low carbon economy will of necessity include the loss of some jobs. However, it is imperative that early interventions ensure pre-emptive reskilling and upskilling of workers affected by this shift. Identification of anticipated labour shortages and needs for reskilling workers will prevent more people being negatively impacted by too regressive policy.

Fund low-carbon technology subsidies via general taxation or carbon revenue.

According to the study, low-carbon subsidies “are a progressive decarbonisation policy, if not funded through a surcharge on electricity users”. The proposed way to do this is through subsidising low carbon technologies or taxing high incomes or carbon revenue earmarking but not through electricity surcharges.

It is believed that these policy options have the best chance of achieving public acceptance and retaining public support.

Of note: “The policy options identified by the study do not face significant legislative barriers in their implementation, as many are within the powers of the EU member states and/or align with EU directives such as the Energy Efficiency Directive (EED). As these policy options are administratively straightforward to implement, the infrastructure and institutional capacity required are often already in place.”

Kristian Ruby, Eurelectric secretary general, commented: “We’re careful in this study to say that there’s stuff you can do it EU level but there are also a number of things that need to be done at member state level.”

“Rather than saying one size fits all, we’re saying ‘here are some ideas, but look at the national situation so that you find out a way that actually works in your country’. In my country we’ve had debates on how to help households phase out their fossil fuel boilers and again this needs to be carefully crafted along with everything else that’s going on in terms of taxes levies and other measures.”

Ruby isn’t oblivious to the challenges. “There are very different sectorial impacts and effects at play here. If you look at, for example, energy intensive sectors, indeed you can get some very tricky interplay between allowances, taxes etc.

“On the other hand, if you look at electricity, we have this situation now that we have a very accelerated energy transition in Europe where high carbon assets are being decommissioned at a very high pace. They also happen to be the ones that handle the backup and the base load production so now we see increased imports of coal electricity from Morocco, from Bosnia-Herzegovina, from Russia.”

He adds that the good thing about looking at this in the electricity sector, especially with border carbon adjustments, is that we actually have a very transparent system in place with the ETS.

“The first thing we could do is to make sure that the carbon price is paid by those exporting coal electricity to the EU. That would actually give a revenue to the EU and could thus help the overall situation and at the same time be implemented in a fairly transparent and uniform way.”

He addresses the issue of sectoral buy-in and affected populations by saying: “Looking at the people in regions that are highly dependent on different types of high carbon assets and production, there are effects that we need to handle, otherwise we won’t have the buy-in for the energy transition that is needed to carry out this enormous project that we very wholeheartedly support.

“We’re here to raise some of these issues and also contribute with some insights of how this could be fixed at EU level, at regional level member state level but also at the very individual level for individual consumers and I want to say that we have to give this Commission credit for taking the just transition agenda seriously.

“We have to remember that just one year ago there was no just transition fund foreseen in the EU budget. Not a single budget line. This Commission took it very seriously, started by putting a clear fund in place and now it is also ramping up this fund very significantly.

“The Commission takes the just transition agenda very seriously and is trying to put in place the relevant policies. The next step is to combine these policies at the EU level with the needed measures in member states.”

What is needed now is for the political will and the actions and desire to make the changes needed to be translated into tangible actions in order to address the distributional impacts of the critical decarbonisation policies the EU needs to combat climate change.

The energy transition can – and should – be a just one for all citizens of Europe.

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