Thu. Oct 22nd, 2020
A ‘solidarity clause’ in the EU climate law

The European Union should include a “solidarity clause” in its climate law to ensure that member states most burdened by the EU’s new carbon reduction targets are compensated for the additional costs of purchasing allowances under the EU Emissions Trading System, writes MEP Anna Zalewska.

Anna Zalewska is a polish Member of the European Parliament for the European Conservatives and Reformists (ECR) group. She is shadow rapporteur on the proposed Climate Law on behalf of ECR.

The European Climate Law aims to set a legally binding target for climate neutrality by 2050, and consequently, to increase the level of reduction ambitions for as early as 2030. With this, the European Climate Law should include a solidarity clause that guarantees a proportional increase in the compensation provided for in the EU Emissions Trading System (EU ETS) Directive for Member States most burdened when implementing these specific EU goals.

In addition, before proposing climate neutrality as a legally binding objective, the European Commission ought to carry out its ongoing impact assessment of the investment and operational costs that the new EU objectives will require and publish its results for individual Member States, not just aggregates for the entirety of the EU across sectors.

Considering the differing levels of wealth and energy sector structure mix across EU Member States, country-specific results would make clear which countries would be encumbered with the highest cost resulting from the new EU commitments per capita. In such a scenario, it would seem fair that these baskets be distributed according to the level of society’s wealth.

Due to the considerable water sources in Sweden, about 40% of electricity is generated from hydropower, and about 39% from nuclear energy, i.e. zero emission energy sources. Denmark, in turn, began construction of its first wind farms in the 1970s, enabling its energy sector composition to have reached about 50% of wind energy from its total consumption. In turn, the Polish communist authorities, based on available raw materials, decided to develop coal-based electricity, which has its consequences to this day.

Poland does intend to modernise its energy mix accordingly with international commitments at the UNFCCC forum and climate objectives adopted unanimously at the European Council summit. However, if one considers increasing ambition for 2030, which had already been agreed on at the EU summit in 2014, we, as Poland and other EU Member States in similar positions, would therefore also have the right to expect solidarity from our European partners. It is not a farfetched argument to suggest sharing both profits and burdens resulting from new EU challenges evenly. This should not be a zero-sum situation, where the profit of some comes at the expense of others, namely resulting from different starting points and the pressured transfer of technology from Western to Eastern Europe. It is a matter of European justice to ensure this is formulated properly.

At present, Poland continues to be burdened with a disproportionally heavy net loss from its participation in the EU ETS. Companies which are subject to bear carbon cost in Poland must spend much more money compared to revenues from the national budget through the auctioning of allowances. In other words, those companies are obliged to buy CO2 allowances also from the national pool of other Member States, resulting in cash outflows of potential investment funds from Poland. Furthermore, with the CO2 prices which can be anticipated to be even steeper in the near future, this deficit will only widen. Its value may reach tens of billions of Euros if the European Commission takes on a new climate goal which is presently being considered.

The current proposal from the European Commission of the European Climate Law would oversee further tightening of the CO2 reduction target by 2030 from the current 40% to at least 50-55% by 2030, with growing investment expenditure related to the change in the energy mix and the development of low-carbon installations. In the ambitious reduction target scenario (55% by 2030), CO2 prices may exceed the ceiling of €75 per tonne and the total cost of purchasing allowances for Poland’s energy sector by 2030 is estimated in this scenario at approximately €68.5 billion.

This means that, compared to the baseline scenario (current 40% emission reduction target by 2030), the purchase of emission allowances alone will cause approximately €30 billion of additional operating costs for Poland’s energy sector. In this way, instead of spending funds to build new low-carbon assets, energy companies will have to allocate their resources to settle their emissions allowances and maintain the operation of generating units, which due to Poland’s energy structure cannot be changed, let alone shut down, overnight.

Only in taking into account the aforementioned estimates can one more realistically assess the real value of the currently proposed compensation mechanisms for energy companies under the EU ETS such as the Modernisation Fund. In this scenario of higher CO2 prices, Poland’s envelope of the Modernisation Fund will amount to about €6.7 billion, which means that in order to obtain full compensation only for the additional operational costs of an ambitious climate policy, it would need to be increased about five times over.

In this regard, the European Climate Law should explicitly declare an increase in resources for transforming the energy mix, in proportion to the additional costs, to be allocated to the poorer Member States and to the EU Member States undergoing the most drastic changes as a result.

Notwithstanding, revenues from the sale of emission allowances at the national level – last year it was €2.5 billion – ought to be transferred to the low-emission transformation of the largest payers of the ETS system. Otherwise, decarbonisation of the energy mix will unfortunately lead to a loss of domestic generation potential and sustainable import of electricity.

As part of the work on European Climate Law and in the subsequent work on the EU ETS Directive, for the above-mentioned reasons I aim to propose that the additional costs of purchasing allowances be fairly divided between individual EU Member States. This would constitute one of the key ways to ensure that Europeans are not divided into winners and losers of the energy transformation.

The European Commission says that it understands these dilemmas, but the mechanisms it proposes to overcome these unevenly distributed costs of transformation between EU Member States are unfortunately insufficient to a too large extent to ignore. For instance, according to the European Commission, Poland may receive about €2 billion for investment and retraining of employees from the Just Transformation Fund, if it is created for 2021-2027. However, to our understanding, these measures represent only about 1% of the investment costs the electricity sector would need to achieve climate neutrality in 2050, creating a clear mismatch.

If the EU takes the idea of solidarity seriously, most of the profits from the EU ETS auction should go to the EU Member States most in need so as to facilitate their transformation and economic development, especially in times of crisis. Then it would be possible to establish a better understanding between Eastern and Western Europe, around what we can call a just energy transformation that leaves not even one participant in this transformation process behind.

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