James Collis, Citizens’ Climate Europe: Carbon pricing is the cornerstone of the EU Green Deal

The European Commission has adopted a set of proposals to make the EU’s climate, energy, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. But the European Green Deal will come also with higher costs and problems for most of the people. Business Review talked to James Collis, the Chair at Citizens’ Climate Europe and a Member of the EU Climate Change Expert Group for ETS2 Implementation to understand more about the Green Deal and what it means for EU citizens.

What are the key elements of the EU Green Deal?

There are over 150 legislative files in the EU Green Deal: 99 completed or close to adoption, 59 announced or tabled, and 9 withdrawn or blocked. Our focus is on the files related to carbon pricing which includes:

• ETS – Emissions Trading System (pricing for generators and large industry – ETS1 for clarity)
• ETS2 – Emissions Trading System extension (pricing extension to buildings and road transport impacting all remaining industry and SMEs, as well as households).
• CBAM – Carbon Border Adjustment Mechanism (pricing of carbon intensive imports to the EU)
• SCF – Social Climate Fund (funding support for the most vulnerable)

The EU strategy to meet the higher climate ambition (emissions reduction) is to have many layers of legislation that overlap, such that if one proves ineffective it will be covered by another. Other elements with substantial interaction to pricing include: Energy Efficiency Directive (EED), Energy Taxation Directive (ETD), Effort Sharing Regulation (ESR), Renewable Energy Directive (RED), National Energy and Climate Plan (NECP) and REPowerEU (in response to the Russian invasion of Ukraine).

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Why is carbon pricing so important in the EU Green Deal and the international context?  

Carbon pricing is the cornerstone of the EU Green Deal, because it is the single most effective policy to reduce emissions and it enhances all other environmental legislation. Internationally the OECD, IMF, World Economic Forum and many other international bodies have long argued that putting a price on pollution is the most important policy for addressing climate change. The World Bank carbon pricing dashboard is useful for gauging international progress and identifying the leaders and laggards.

How will Carbon pricing changes impact business in Romania?

Romania, like all EU member states, must implement the ETS2 carbon pricing by 2027/2028. Some member states have implemented pricing earlier as they see economic and environmental benefits. The initial ETS2 price will likely be between €50 and €70 /tCO2eq, this is the same price range as for the main ETS system so far in 2024.

The actual impact on business in Romania depends on the national implementation yet to be decided by Romanian politicians and legislators. The underlying monitoring and measurement processes are largely sorted, yet there are a number of different options for politicians to consider. The primary concerns expressed by other members states revolve around:

• Price Volatility – how to address the predictability of pricing
• Public Support
• Cost of Living

Whilst these issues might appear to be focussed on domestic households, they also have a direct bearing on businesses owing to the affordability of goods and services being sold by business. There are a number of models and real world examples of the impacts for business based on the political choices for revenue use.

How will Romanian imports and exports be protected?

It’s important to differentiate between intra EU import/exports and Romanian trade with countries outside the EU. I understand that the vast majority of Romanian trade is intra EU and therefore already operates on a level playing field established by the EU with the ETS1. As the ETS2 is introduced this will also be consistent across the EU and will maintain a level playing field.

For trade with countries outside the EU, the approach to the risk of “carbon leakage” (unfair import/export pricing) for large industries under the ETS1 is to provide Free Allowances. Between 2027 and 2034 the CBAM (carbon pricing for imports) will be introduced for carbon intensive imports by sector, and associated Free Allowances will be phased out accordingly. This levels the playing field for imports to Romania from outside the EU. Free Allowances are not available under the ETS2. The EU is expected to consider how exports to countries outside the EU are protected in 2025.

The current CBAM is generating international responses, as it was designed to do, so also companies outside the EU will start paying for their emissions. These responses whether via trade, the WTO or other means will likely influence the EU’s position.

There are precedents in other countries for Romanian politicians to consider. The UK, before Brexit, established a Carbon Floor price under the original ETS1 and included the ability to compensate exports in legislation agreed with the EU. More recently Austria implemented an ETS2 ready policy called “KlimaBonus” which established an increasing non-volatile national carbon price and included a mechanism for protecting Austrian businesses.

What might be the impact on the Romanian economy?

The primary impact will be a financial incentive to reduce emissions. The economic advantage of this type of signal is that the most cost effective reductions offer the fastest payback. The secondary benefit is it’s business as usual, enabling organisations to focus on their core competence and competitiveness in terms of the goods and services they provide.

The biggest unknown is what will happen with the additional revenue? Some established businesses may prefer to lobby directly for funding support, whereas the majority of SMEs and some larger industries would be better served by a level playing field, recycling the money directly to compensate the purchasing power of end consumers. This ensures the ability to pay the increased costs, allowing costs to be passed on and generally makes cleaner greener companies more competitive.

There is good evidence that recycling the money to households has a positive impact on the economy and jobs.

What options does Romania have for implementation of the ETS2?

The least effort option is to accept the ETS2 price and pass it on directly to business and citizens, regardless of how volatile it is. Taking the revenue directly to the Treasury to be used under the established rules.

A small number of member states have chosen the “Irish derogation” under the ETS2 which allows a country to use a national carbon price until 2030. Whilst Romania might not be amongst them, the Ariadne project reviewed the legal options for Germany and shows this is still possible providing the monitoring and reporting obligations are met. National pricing enables greater predictability for business, and more certain revenue for government to address public support and the cost of living.

For Ireland in particular this approach supported clear revenue re-use associated with the energy transition. This is consistent with a number of countries, notably the Nordics, who have already established carbon pricing in the ETS2 sectors with effective social support. These countries have not yet decided how to integrate these policies with the ETS2.

Another option is around the timing. The Austrian ETS2 ready KlimaBonus was introduced in 2022, delivers predictable pricing and has a very high level of recognition amongst the public and business. Sweden have publicly noted that national carbon pricing is not complicated to introduce, certainly easier than ETS type systems, and can be done relatively quickly.

When the French introduced ETS2 type carbon pricing they chose to recycle a small proportion of the revenue to just the most vulnerable. This is similar to the EU Social Climate Fund (SCF) and proved publicly unpopular. Even the EU recognises the SCF is unlikely to be enough.

One of the obvious challenges with the revenue from carbon pricing is that ultimately it goes away, so it raises questions about the long term tax base. Which of course adds to the context around the circular economy, especially as many European countries with higher carbon pricing have deliberately shifted the tax base from employment towards being more resource based.

What tools exist to help legislators understand the environmental and social impacts?

In terms of overall environmental impacts the En-Roads climate simulator from MIT (https://www.climateinteractive.org/en-roads/) enables legislators to explore the relative impacts of dozens of policies. It has been actively used in meetings with legislators as well as teaching environments from universities to high schools. The Paris Agreement Compatible scenarios (PAC) developed by civil society guides planning and infrastructure towards a Europe wide 2040 NetZero goal.

The Carbon Pricing Incidence Calculator from the Mercator Research Institute (CPIC – https://www.cpic-global.net/) allows users to explore the distributional consequences of carbon pricing and various compensation measures in an accessible manner for 87 countries (including Romania).

Moving beyond understanding the impacts to designing Romania’s specific policy implementation, whilst the boundaries are defined by the EU Green Deal, there are well established principles and decision criteria:

• OECD FASTER Principles for Successful Carbon Pricing (https://www.oecd.org/environment/tools-evaluation/FASTER-carbon-pricing.pdf)
• Brookings Institute – 11 essential questions for policy to price carbon. (https://www.brookings.edu/articles/11-essential-questions-for-designing-a-policy-to-price-carbon/)

As an active advocate for carbon pricing Citizen’s Climate Europe has run workshops and presentations based on the above with industry, politicians and NGOs to facilitate deeper understanding of the pro’s and con’s of the options.

How does the ETS2 align with the Fepra and World Bank recommendations on circular economy?

The main connection is that circular business models and the ETS2 are aligned in their objectives to reduce greenhouse gas emissions, as such they are complementary and reinforcing processes. As member states face additional financial costs if they underperform on certain elements of the EU Green Deal, all incentives directly support the state.

A potentially important secondary aspect highlighted from the Fepra report is consumer education and choices. Whilst each sector will have its own consumer profiles and criteria, the society wide impact of the ETS2, depending on the government’s implementation and communication strategy, could substantially increase awareness on business efforts around circularity. In Austria the KlimaBonus approach has created over 80% brand recognition amongst the public.

What is next after carbon taxation and ETS2? What steps will EU take for circular economy?

An ETS for Agriculture has been modelled and discussed, though this remains a challenging sector politically. The EU Court of Auditors report on the “Polluter Pays Principle” could influence a number of changes on carbon taxation and circular economy legislation. Also changing the requirement for unanimity on taxation, especially related to the environment, would enable the EU to be more ambitious, not blocked by small minorities of member states. This could unblock long overdue ETD reforms, affect Free Allowances, make harmonising the ETS1 and ETS2 more straightforward with floor pricing, and enable taxation of intra-EU maritime and aviation transport.

Watching public debates involving the EU, Finance Ministers and NGOs you get the impression that there are many more positive comments around the circular economy, doughnut economics or tax base changes, all signposting willingness to shift in this direction.

Other than the EU or national governments leading, Denmark’s construction industry is one of the earliest examples of an industry led initiative aiming at Paris compliance by adopting circular economy principles and that advocates for supporting legislation (https://reductionroadmap.dk/reduction-roadmap). So the future change can be driven from a variety of perspectives including, as the Fepra report notes, from individual companies in Romania choosing to leapfrog the intermediate steps and compete at both national and the EU level.