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Governments need to frontload investments before the carbon price kicks in, so people see there is a plan to provide them with alternatives.
Energy costs and taxes are political dynamite, easily exploited by populist parties. And yet, the EU is set to introduce an economy-wide carbon price (ETS2) on transport and heating fuels in 2027.
Carbon pricing for petrol and gas is not a new idea. In fact, two-thirds of EU citizens already pay some sort of carbon price on transport fuels – in addition to fuel duty.
T&E has always argued for regulations that make car companies or boiler manufacturers responsible for developing and marketing affordable green products. At the same time, making pollution more expensive clearly improves the business case for efficiency and clean energy, especially at a time where oil prices are very low. That is why T&E supported the EU’s carbon market for heat and transport, which was agreed after a marathon ministerial session in December 2022.
The decision to create a Europe-wide carbon price was right but creates significant political risk, both because of how the carbon market was designed and how it is being communicated. What can be done to defuse the situation?
Let the rich pay the carbon price
While wealthier people can afford to pay more or shift to EVs and heat pumps, ordinary families do suffer pain at the pump and can’t easily avoid fossil driving or heating. This ‘lack of alternative’ is the top reason people dislike higher taxes on ‘essential goods’ like petrol and gas.
So, fairness and political intelligence dictate that a carbon price should not impact everyone in the same way. Fortunately it is absolutely possible for the rich to pay most, or even all of, the carbon price. T&E data suggest the top 30% earners account for 50% of fuel sales, which means they’d also pay for half of the carbon levy. Governments should give back every euro or złoty they raise from low and middle-income people.
Spend the money on things people like and need
Even after compensation – e.g. cashbacks, lower income taxes for all except the top 30-50% of earners – there will be plenty of money to invest in clean transport solutions. The amounts available increase when also tackling elite pollution (see below). Governments need to frontload investments before the carbon price kicks in, so people see there is a plan to provide them with alternatives.
Alongside investments in cycling and public transport, targeted social leasing of electric cars where families get access to €100-200/month electric cars is a great and widely supported solution. The same goes for lower taxes on Europe’s sky high electricity taxes and levies.
Don’t let private jets and business travellers off the hook
A fair carbon price has to tackle elite pollution. How to explain that all must pay more for petrol except private jets and yachts? Even more impactful would be addressing carbon tax-free flights to New York and Bali (which are exempt from the EU ETS, for now), or business class tickets. In the long run these need to be included in the aviation ETS, until then they can easily be subjected to a CO2-related ticket tax.
Create a price control mechanism to keep carbon prices around €55/tonne
In emissions trading, the price floats based on supply (emission allowances) and demand (petrol and gas sales). A carbon price that could be anywhere between €10 and €250 euros a tonne is scary and unpredictable. Since prices cannot be capped at national level – they can only be compensated for – we need a Europe-wide price cap.
The current law contains a soft cap of €45/tonne, or 11cts/litre. (That’s in 2020 prices. Since the cap is adjusted for inflation, it is now €55, or 13cts/litre, and is projected to rise to €60 in nominal terms by 2030.) This is similar to, for example, France and Germany’s CO2 tax and can be gradually increased over time. Making the soft cap ‘harder’ can be done by strengthening the so-called ‘market stability reserve’ of emissions allowances that inject liquidity into the market if prices risk breaching the cap.
Eliminate national carbon taxes when ETS2 kicks in
Almost half of EU citizens live in a country with a national carbon tax. ETS2 will almost certainly replace the French, German and Swedish national CO2 taxes. So, the easiest response to the Rassemblement National’s campaign in France against the EU carbon levy is to announce that the EU system will simply replace the already existing French carbon tax. This, of course, is only possible once governments know maximum ETS2 prices.
Governments have full control over how they use the revenues. They can compensate and invest as they please. The Commission can adjust the market stability reserve – it has done so numerous times for the industry and power ETS.
And of course the best way to lower the carbon price is to reduce emissions; so the Commission really should stop tinkering with the vehicle CO2 standards, and focus on rolling out corporate fleet regulations so company car and truck fleets go all electric by 2030.
The creation of ETS2 was a visionary decision. But vision without proper execution is hallucination. With the right measures, it is still possible to defuse this ticking time bomb.
