EXPLAINER | Can Europe's new Social Climate Fund protect poor from rising carbon cost?

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  • The EU is encouraging businesses to reduce pollution by raising carbon prices- which may increase the cost of fuels.
  • A Social Climate Fund of about €87 billion has been established to soften the blow on households and small businesses. 
  • The new scheme for carbon pricing could be approved by early 2023, but the rules may kick in four years later.
  • For climate change news and analysis, go to News24 Climate Future.

As the European Union prepares to extend controls on planet-heating carbon emissions to heating and transport, politicians are wary of the social unrest sparked in France in 2018 when the government hiked taxes on diesel, hitting consumers hard.

The "yellow vest" protests over the rising cost of living and perceived injustice of making ordinary people pay for climate measures forced a U-turn on policy - and were widely seen as a lesson in the need to make the green transition fair.

A new deal to overhaul the EU's carbon market from 2027 by cutting emissions faster and imposing new CO2 costs on buildings and road transport fuels also includes a fund to cushion the blow of higher prices for households and small businesses, and to help them invest in renovations and electric vehicles.

Here's what you need to know about the Social Climate Fund:

Why is the EU setting up a Social Climate Fund?

First announced in July 2021, the fund was developed under negotiations to reform the EU's emissions trading scheme (ETS), which caps the carbon pollution of thousands of factories and power plants.

The ETS works on the "polluter pays principle", to force companies to cut carbon dioxide emissions and invest in greener energy and energy efficiency by putting a price on carbon.

The scheme is now being extended to cover other sectors, to enable the EU to meet its target of reducing greenhouse gas emissions to at least 55% below 1990 levels by 2030.

Under the updated ETS II scheme, which will expand to buildings and road transport fuel, there are concerns that the reforms could push up energy and fuel prices for those who can least afford it, as the higher cost of carbon is factored in.

"Not everyone will afford to rapidly renovate their home and/or replace their petrol car with an electric vehicle," said Dimitri Vergne, sustainability team leader for BEUC, a Brussels-based European consumer protection organisation.

"It is crucial to provide the most vulnerable consumers with financial support so they can switch to cleaner alternatives."

READ | OPINION | Climate change can be beaten - why some scientists are hopeful

To compensate for the extra costs, the EU's €86.7-billion (R1.6 trillion) Social Climate Fund will provide direct payments to citizens and small businesses, on a temporary basis.

It will be up to national governments to disburse the funding in a way that supports investment in energy efficiency in buildings and improves access to low-emission transport.

Vergne welcomed the EU's efforts to provide more financial aid to help consumers make a green transition, but said the new fund would only represent "a fraction of the support needed".

When will it start and where will the money come from?

EU leaders and parliamentarians still need to rubber-stamp the ETS II deal, which could happen early in 2023.

The new rules would kick in four years later. But if fuel and energy prices stay as high as they are today, the reforms could be delayed to 2028.

The Social Climate Fund is set to run from 2027-2032, but it may start a year early to help consumers prepare for price rises, using revenues from auctioning 50 million carbon allowances in 2026.

After that, it will be funded by up to €65 billion (~R1.2 trillion) in revenues generated from the expanded carbon market and an additional 25% from national governments.

If carbon prices hit 45 euros a ton, then extra emissions permits will be released into the market to temper prices.

"The 45-euro ceiling to the price of ETS II allowances until 2030 will guarantee that consumers won't suffer from sudden price hikes due to the market fluctuations," said Verge.

Who will win and lose from the new climate measures?

While most experts and politicians agree that the Social Climate Fund will help share the financial burden of climate action more fairly, some argue it will not fully offset the hit to the lowest-income households.

Clotilde Clark-Foulquier, a project manager at FEANTSA, a European federation of national organisations working with the homeless, said the ETS II plan "is biased from the start".

"It takes with one hand, redistributing partially with the other," she said.

Michael Bloss, a German Green Member of the European Parliament (MEP), said that as everyone will pay the same price for emitting carbon on a daily basis, heating and driving will eat up a larger share of disposable income for lower earners.

"So the impact on everyday life for poor people is bigger than for the rich," he explained.

Figures from the EU statistical office, Eurostat, show that about 35 million people lived in energy poverty in 2020, but today's energy crisis is expected to have pushed that higher, the European Commission says on its website.

"Energy poverty is most acute in central and eastern Europe, as well as in southern Europe, where the building stock is overall less energy-efficient," said Clark-Foulquier.

"It is most likely that a further increase in energy prices will therefore have a grimmer impact there."

That risks a geographical divide, with richer nations like France able to give consumers more support for the green transition, said Sanna Markkanen, a senior analyst at the UK-based Cambridge Institute for Sustainability Leadership (CISL).

It could also create a mobility divide, leaving those who lack reliable access to public transport facing a fuel penalty for using their cars, she explained.

The Social Climate Fund will not be enough to compensate for the increased costs of heating and transport for the most vulnerable households, she added.

"One of the biggest risks of ETS II is of losing public support for high-level climate ambition in Europe. This may happen if the policy hits the lowest-income households the hardest and pushes more people into energy poverty," she said.

How could the burden be shared more evenly?

Romanian MEP Drago? Pîslaru told journalists that other funding is available, such as the EU's Just Transition Fund, which countries can use to shield the public from higher prices.

But drawing on that would shrink investments in other areas, such as infrastructure or education.

"You can only spend a euro once," said German MEP Bloss.

Green building renovation needs to go hand-in-hand with social safeguards such as rent caps or boosting social housing stock, to keep it affordable, said Clark-Foulquier.

She urged the EU to raise more funding for lower-income groups using its next budget and the bloc's windfall tax on energy company profits.

CISL's Markkanen said a fairer system would be to apply carbon pricing more selectively - for example, only to the top half of households in terms of income, using means-testing to prevent the poorest paying more for their energy.

That could be combined with a postcode mechanism to ensure petrol prices remain affordable for those with limited access to public transport, she said.

"Climate policies must be socially just," she added. "At the same time, without climate justice, there can't be social justice, because climate change impacts are going to affect the most vulnerable." 

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