The European Carbon Market – EU ETS II 07.11.2023

At the beginning of this week, the price of the EUA certificate reached the lowest level in the last five months, closing the ICE ECX futures market in London at 75.66 euros/tCO2 (06.11.2023). In October, prices were 3.2% lower than in September. A similar downward trend can be observed on the European energy market, as a result of forecasts regarding a mild winter, as well as the decrease in gas demand from the North Sea and a decrease in nuclear energy production in France.

The European Social Fund and the EU ETS II

As part of the revision of the EU ETS ‘’Fit for 55’’ package, the European Commission has proposed to extend the emission reduction obligation to buildings and road transport sectors as well, creating a true parallel ETS, in fact called EU ETS II, which will operate by auctioning allowances only. To address the social impact arising from this new system, the Commission has proposed to introduce the Social Climate Fund, an economic fund to address challenges of the energy transition and achieving emissions neutrality by 2050 based on the data collected from a 2021 European Commission study in which 34 million people in Europe, nearly 9% of the population, said they lacked the financial support needed for sufficient heating in their homes.

Regulation 2023/955 is the legal basis establishing EU ETS II and the Fund and entered into force on June 5, 2023.

The main purpose of the Climate Social Fund is to provide temporary direct income support to the most vulnerable citizens and micro-enterprises affected by rising energy costs, particularly for heating and transportation due to the increased environmental obligations resulting from the introduction of ETS II. The fund, however, also aims to incentivize investments in member states that reduce emissions in the road transport and building sectors to improve the efficiency of both sectors and reduce environmental impact and social pressure together.

In this regard, the European Commission introduced two new contents during discussions on the Fit for 55 Package:

  • “Energy Poverty” which shows households to lack sufficient economic resources to access essential energy services, such as heating, cooling, lighting, and energy to power appliances, and thus does not allow for the right to health and a decent standard of living;
  • “Mobility Poverty”  – the Commission refers to the condition in which households face substantial costs to get around, having limited access to affordable means of transportation, with a specific focus on critical locations such as islands, mountainous regions, and less developed remote areas. These two concepts have been the basis for all discussions of the Social Climate Fund.

Part of the Fund will be financed by the earnings from the auctioning of ETS II emission allowances (up to 65 billion euros), with an additional 25 percent coming from resources made available nationally by member states, for a total of about 86.7 billion euros. Projects targeted for investments will have to meet the principle of “no significant harm” and will have to demonstrate actual emission reductions.

The existing Innovation Fund, which is under the ETS, will also receive significant support, with an increase in dedicated resources, again from the auctioning of allowances, from 450 million to 575 million allowances until 2030.

The Social Climate Fund will be operational from 2026, while the new ETS II for buildings and transport, will come into effect the following year, in 2027, or 2028, if energy prices continue to be too high.

The European Commission also included a requirement for governments to submit a “Social Climate Plan” by June 30, 2025, with the goal of stating which projects they want to target the Fund’s investments on, feasibility studies, long-term environmental goals, and state-specific needs to address and mitigate negative revenue impacts in the short-term. The Commission also urged states to consult with local governments and civil society organizations during the development of their Social Climate Plans to make sure that demands of those to whom the Fund’s aid is directed can truly be heard. Without a doubt, the adoption of the Social Climate Fund represents an important social justice milestone on the long road to energy transition and a clean, low-carbon economy.

Source: The European Commission, Brussels & Aither Group, Switzerland

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