The Brief – Unjust transition ahead

Europe must spend hundreds of billions of euros in the coming years to reach its climate targets, but with public spending limited by strict budget rules, it will be mostly consumers footing the bill.

If this European Commission will be remembered for anything, it will likely be for its climate policy. With the targets adopted under Ursula von der Leyen, the EU wants to be climate-neutral by 2050 and reduce emissions by 55% by 2030.

To achieve those targets, hundreds of billions of euros must be spent on greening the economy. While politicians love to talk about stuff like hydrogen, green steel, and battery factories, the biggest chunk of investments is needed to renovate buildings and reduce the emissions caused by heating systems.

The European Commission estimates an additional investment of €165 billion into building renovations each year – on top of what has happened so far.

Who will pay for this? Realistically, there are two options: Either it’s national governments massively subsidising building renovations, or it’s those using heating systems – consumers like you and me.

You might also think that even if governments subsidise renovations, in the end, it will also be you and me paying for this via our taxes.

But governments can borrow money and do so more efficiently than each consumer individually.

By financing climate investments through public debt, it wouldn’t be today’s taxpayers paying for it, but tomorrow’s – when GDP and wages are higher due to economic growth in the meantime.

Also, taxes are paid progressively, meaning high-earners and the wealthy are – at least theoretically – expected to contribute more. This distributes costs more fairly throughout society than letting each consumer, including the poorest, pay for the renovation of their own home.

In short, it would have certain advantages to let (future) taxpayers pay for today’s green investments, not only consumers.

With the approach pursued by the EU, however, it is looking almost certain now that European consumers will be left alone with the lion’s share of the costs.

With the EU’s new rules for national budgets, which prioritise debt reduction over climate investments, national governments’ ability to take on additional debt is going to be very limited.

Meanwhile, the EU itself will go back to having almost no fiscal firepower after the end of its post-COVID Recovery Fund in 2026, so it can do even less.

Instead, consumers are expected to shoulder the costs by themselves.

From 2027, they will have to pay the EU’s carbon prices for heating and car fuels, dubbed the ETS2.

Almost certainly, those will be significantly higher than the €45 per tonne of CO2 that EU institutions aim for – more like €200, according to a recent publication by think tank Agora Energiewende.

For a single-family home heated with gas, and with a gas demand of 20,000 kWh per year (which causes 4 tonnes of CO2, according to consumer organisations), the annual extra costs could total around €800.

Economists urge compensating consumers for the exploding carbon costs, but their calls so far remain unheard. In Germany, which already has a (low) carbon price for buildings and road transport, the government prefers to spend its revenue on other priorities, such as industrial subsidies.

To escape the carbon price, homeowners will have to pay for renovations and new heating systems – which goes into tens of thousands of euros per home. 

When the costs start biting, and it is not unreasonable to think protests could follow, it seems unlikely that politicians can stick to the adopted policies. Instead, climate policies could be abandoned, with the EU’s carbon market for buildings and road transport being the first target.

Coincidentally, 2027 is not only the start date of the ETS2 but also the year that Marine Le Pen could become French president.

Europe’s centrists will be inclined to scrap the carbon price (and thus the EU’s main instrument to fight climate change) rather than let a right-winger govern the second-biggest EU economy.

Pessimistically, neither conservatives nor progressives will come to the carbon market’s defence – as the former don’t actually care that much about the climate, and the latter not so much for market-based solutions.

Without a strong enough carbon price, however, most of the necessary investments into building renovations won’t pay off, so they simply won’t take place.

As a result, the EU will be heading in one of two ways: Either the costs of necessary climate investments will be distributed in an extremely unfair manner, or they will not take place at all.

So yes, this Commission will be remembered for its climate targets. But don’t confuse this with having a good plan on how to achieve them.

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The Roundup

As part of the European Green Deal and the new circular economy action plan, the European Commission put forward a revision of the Packaging and Packaging Waste Directive (PPWD) in November 2022. The initiative’s main objective is to ensure that all packaging is reusable or recyclable in an economically feasible manner by 2030.

Relaxing state aid rules is a step forward in unlocking new green financing, but “we must move quickly” on the capital markets union (CMU) to reach private investors’ money, French business association Medef’s chief Patrick Martin said on Monday.

Expectations for a successful transition to an e-administration in Germany are high among politicians and business leaders, but in reality, rollout remains slow, and the laws supposed to facilitate it are being criticised for failing to prioritise. 

Thirty-one countries have pledged to stop all deep-sea mining in polar regions at the One Planet Polar Summit, which ended in Paris on Friday, in a deal that Norway still needs to sign amid criticism of its recent decision to allow Arctic mining.

EU defence ministers on Tuesday approved a rehaul of the defence capability development priorities (CDP) to reflect the need for more conventional defence equipment and counter-drone tactics in their armed forces’ ranks, learning lessons from Russia’s war in Ukraine.

Sofia has turned its back on €80 million from the EU Recovery Plan intended for the construction of a proton centre for the treatment of oncological diseases in children, sparking a conflict between the government and doctors.

Palestinians trapped inside Gaza’s biggest hospital were digging a mass grave on Tuesday to bury patients who died under Israeli encirclement, and said no plan was in place to evacuate babies despite Israel announcing an offer to send portable incubators.

The lack of adequate testing combined with delayed access to updated vaccines and difficulties in obtaining antiviral drugs pose severe challenges for Poland to combat the ongoing COVID surge, experts warn.

Look out for…

• Parliament President Roberta Metsola meets Latvian President Edgars Rinkēvičs on Wednesday.
• Climate Action Commissioner Wopke Hoekstra meets with climate experts including stakeholders, civil society and academics in Beijing on Wednesday.
• African, Caribbean, and Pacific-EU (ACP-EU) Council of Ministers meets in Apia, Samoa on Wednesday.
• General Affairs Council meets in Brussels on Wednesday.

Views are the author’s

[Edited by Zoran Radosavljevic/Alice Taylor]