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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The Biggest Problem With The EU’s Emission Trading System

The European Union's Emissions Trading System has seen record-high prices lately. This has prompted two kinds of response: on one side, some analysts and officials have welcomed the trend, saying it would motivate businesses to decarbonize more quickly. On the other, some, including European business associations, have warned that record carbon prices are hurting their profitability and competitiveness. Now, governments have cried out against the EU's emission ambitions, too. The reality is that not everyone can afford the green transition price tag.

The European Commission this month proposed the setting up of a new emissions trading system for the building and road transport sectors, to make part of a larger climate package that the EC will release in July.

"The idea is to have, complimentary, the introduction of an own, separate emission trading system at a very low scale at the beginning. Immediately coupled with a clear social compensation structure," EC President Ursula von der Leyen said.

The proposal prompted a quick reaction from Poland. Prime Minister Mateusz Morawiecki said the plan would disproportionately affect the poorer members of the European Union, which won him the support of those same poorer members, including Romania and Bulgaria, but also the wealthier Baltic States, the Financial Times reported this week, citing diplomats.

Morawiecki was not the only one. Earlier this week, in a piece for Euractiv, former Polish environment minister Marcin Korolec wrote that "The Emissions Trading System (ETS), a key pillar of EU climate ambition, isn't a one-size-fits-all instrument, and widening the scope to include buildings and transport may not necessarily lead to emission reductions, but we do risk a social backlash in Europe."

The social backlash would be the result of the cost of emission reduction across the EU becoming clearer than before, thanks to the extension of the ETS mechanism. As Korolec illustrated it, "After all, an owner of a large off-road vehicle/SUV from one of the northern EU member states, such as Germany or Sweden, would have to pay the same carbon price as a pensioner from central and eastern Europe, such as eastern Poland or Bulgaria, who has a very different income level and often already struggles to pay the bills for heating their home."

Related: Colombia’s Oil Industry Is On The Brink Of Collapse The rich-poor divide within the European Union is a deep one, indeed. This week's emissions trading debate has exposed this gap clearly. For all the stated goodwill and plans for the good of all, the fact remains that not every member of the EU can afford a green transition within the parameters that Brussels has set. At least not without much help from wealthier members.

Yet, those wealthier members have worked hard to become wealthy. As such, they are understandably unwilling to pitch in more than what they consider their fair share to drag the poor relations into the green energy club.

As a result, the divide is deepening.

This divide, according to the Financial Times, ended discussions on how to distribute the cost of emission reduction in favor of a detailed examination of the impact of the proposed emissions trading mechanism on the environment, communities, and the economy.

One would think such an analysis would have been conducted before talks about implementation began. But the EU is rushing to cut emissions—so much so that they might be overlooking things like the competitiveness of European companies against their non-European peers that are unburdened by the obligation to pay for carbon emissions and the reasonable wellbeing of the poorer European communities.

The proponents of the "Whatever it takes" approach would likely argue here that the higher the carbon price tag in the building and road transport sectors, the more motivated companies operating in these sectors would be to adopt a lower carbon footprint. However, the recent complaint of the European Steel Association about record-high carbon prices suggests that this argument lacks legs. Besides hurting European companies' competitiveness, the ETS is leaving them with fewer resources to spend on low-carbon tech to reduce their footprint.

The problem is even bigger for the poorer EU members. Once the price of road transportation goes up, the price of everything goes up. This would hurt consumption and, eventually, economic growth. While it has become something of a fashion statement in analyst circles that we don't really need economic growth to do well, stagnation is still not something governments like, on either side of the big European divide.

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So, what's to be done? EC President von der Leyen has said that the new ETS mechanism for buildings and road transportation would include a compensation scheme for the less well-off European Union members.

"The burden has to be carried by those who are on the producing side, on the industry side, and on the higher incomes, without any question," von der Leyen said, as quoted by the Financial Times. "This transformation has to be socially just. It has to be fair, otherwise, it won't take place."


Yet Poland, for instance, has a big coal industry—meaning it is a big emitter. It is not, however, considered to be on the "higher incomes" side. Other Eastern European states also have big polluters, and while it would be fair to make the polluters pay for their emissions, they would invariably find a way to pass the additional cost to consumers or go under proudly as their too-expensive output becomes uncompetitive. 

The European Parliament will be voting on the proposed scheme in July. That leaves the EU less than two months to build a bridge across the divide between the rich and the poor in Europe.

By Irina Slav for Oilprice.com

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