In July 2021 the European Commission proposed a new emissions trading system for road transport and buildings (the so-called ‘ETS2’ or ‘ETS BRT’). The scheme is designed to help member states reach their national climate targets more easily, while also generating revenues that can be used to support the lowest incomes in the transition. This social aspect was formalised in a proposal for a new Social Climate Fund (SCF). While scaling up the carbon price signal to reduce demand and ensure the EU’s 2030 climate target is important, Transport & Environment (T&E) thinks that for the climate transition to have any hope of working, the EU should ensure that big polluters pay the bulk of the costs.
That means wealthier households, who would not benefit from the revenues redistribution, but also importantly the fuel suppliers. Big Oil has known about the destructive impacts of their business for years, while paying almost no taxes and making nearly 2 trillion in profits in the last 30 years. It’s high time for Big Oil to pay back to society. They should be required to absorb part of the EU’s new carbon price, while we use the remaining price signal to break free from our energy dependence on profit hungry multinationals and oligarchs.
T&E commissioned a legal study that identified a limit on the share of the ETS2 price that can be passed on to end-consumers as the most promising pathway for making the fuel suppliers pay. If they pass on more than the legal limit, they pay a fine into the SCF which is designed to support vulnerable households who might not otherwise be able to move their transport and heating consumption away from fossil fuels.
This proposal can be designed in three different ways:
- It could take the shape of an implicit price corridor. A minimum carbon price would be paid solely by the end-consumers. But if the price goes above a certain threshold, fuel suppliers would be required to absorb the entire share of the ETS2 price above that level. This would come down to a price floor and ceiling, though only for end-consumers and not for fuel suppliers. If the carbon price is in between the price floor and ceiling, the fuel suppliers would be required to absorb a significant share of the ETS2 price.
- Alternatively the fuel suppliers could be required to absorb half of the carbon price, regardless of how high it is. Such a set-up could then be accompanied by a price ceiling, to ensure that member states have predictability in planning their social compensation measures and that middle income households, who don’t benefit (as much) from redistributive measures, don’t experience regressive effects in case of very high carbon prices.
- To reduce the administrative costs of monitoring the cost pass-through, it could also be considered to give fuel suppliers the option not to submit a breakdown of their cost components on the condition of a higher fine into the Social Climate Fund. Also under this option ETS2 prices could potentially reach very high levels (even if they could now be mitigated with a much larger SCF) and could thus be accompanied by a price ceiling.