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The Big Picture: Political Test for EU Climate Policy

Copyright © 2021 Energy Intelligence Group

• The EU’s new raft of sweeping climate policy proposals, unveiled this week, could hit consumers more explicitly than previous climate measures, potentially widening divides between the EU’s wealthier and less well-off member states and citizens. • But the policies are not expected to challenge broad and growing political consensus on the need for climate action, with pushback so far coming mainly from heavy industry and fossil energy lobbyists jockeying for position ahead of further negotiations. • Instead, expect a lot of the debate to be around how to make this a just and equitable energy transition -- and that means funding and tax policies that spread the burden of deeper decarbonization. The EU is confronting a next level of climate policymaking as it moves beyond the low-hanging fruit of power decarbonization to lay a path to cutting greenhouse gas emissions by 55% from 1990 levels by 2030 and hitting net-zero emissions by 2050. Facing such a monumental task, the EU’s less advantaged eastern and central members -- some of whom also rely relatively more on fossil fuels, in particular coal for power generation --- could balk at the new demands placed on them. There is also concern about the impact on poorer households in richer member states, with some politicians and campaigners drawing parallels to France’s Yellow Vest protests, where a poorly timed fuel tax increase of a few cents sparked a backlash fueled by wider issues of income disparity (EC Mar.15'19). Brussels is aware that populists could latch on to specific trigger issues and turn public opinion against the broader Green Deal objectives. To prevent that, it is emphasizing budgeted EU funding for social cohesion and an associated jobs push could help prevent such backlash and protect the average consumer from higher energy bills. Key Policies As the EU focuses attention on decarbonizing industry, heating and transport, its "Fit for 55" policy package will affect issues closer to people's everyday lives like personal transport and home heating (IOD Jul.14'21). This includes revisions to the EU’s Emissions Trading System (ETS), which alongside energy taxation changes signal a shift to stronger carbon pricing across the economy. There are new targets for renewables in power, as well as transport and heating. Updated automobile carbon dioxide standards will also effectively phase out sales of new internal combustion engines (ICE) by 2035 -- supported by new targets for electric vehicle (EV) and hydrogen refueling infrastructure. Other proposals seek to speed up the decarbonization of aviation and maritime transport, including via new taxes. A new carbon border levy will be put in place, too. Cost Impact Managing the actual or perceived impact the legislation will have on people’s wallets will be its key to success. But consumers are long used to fluctuations in power and fuel prices driven by wider market dynamics, and Europe’s high fuel and vehicle taxes already apply a high implicit carbon price to motoring. In most instances, proposed measures could just add more layers of taxation that might not stand out. Still, the EU is trying to handle the cost burden carefully, largely by getting ahead of it. Social cohesion funds are seen as essential to a just transition -- leaving no consumers or countries behind. Fuel poverty is a widespread problem even in the EU’s richest member states. Recognizing this, the EU proposes that 25% of the revenue generation by extending emissions trading to buildings and road transport will go to measures to help those less well-off to carry out building renovation, decarbonize heating and cooling of buildings, and to finance zero- and low-emission mobility and transport. Member states can match that "social climate" funding. EU-Wide Buy-In What might surprise observers outside of Europe is the broad political, social and industrial consensus on moving ahead with these climate policies. All member states have committed to net-zero by 2050 targets, with the exception of Poland, which backs the proposal but says it needs its own timeframe to achieve it. Arguments mostly center around degrees and timing of climate action needed, versus the climate skeptic camp that informs the US debate (EC Mar.19'21). The recent vote in the European Parliament setting a 55% emissions reduction target by 2030 into law passed by a wide margin, supported by most mainstream left and right political groupings. Criticism came at the margins: Greens believed it was too tame, the far right thought it went too far. The "Fit for 55" package is also being pitched as bringing skilled jobs and commercial opportunities, which could be key to securing lasting support. Some industrial groups are also on board, such as the Federation for German Industries (BDI) and the European Chemical Industry Council. The BDI sees a positive effect on the German economy of following strict climate targets, which they believe would trigger extensive modernization of the German economy. European oil majors with advanced transition strategies are meanwhile under investor pressure to do even more. Managing the Pace Dealing with perceptions of not doing enough -- rather than doing too much -- will be the next challenge for Europe. For example, only a year after setting its initial 40% emissions reduction target by 2030, Brussels increased it to 55%, the earlier target seen as lacking in ambition. Notably, 11 EU member states had lobbied to ban EU funding of crossborder natural gas projects, although the EU ultimately agreed to prolong it (related). And some parts of the economy have moved way beyond the EU’s climate ambitions. The automotive industry, for example, has already set phaseout dates for ICE vehicles between 2028-35 without the need for policy action amid a huge investment push to produce EVs. Continued declines in renewables costs will also inform the pace. For example, decarbonizing power, now seen as "low-hanging fruit," was viewed as more challenging just a few years ago. Wednesday’s big unveiling of policy proposal marks only the start of many more months of debate expected between EU officials, elected representatives in the European Parliament and member states in the EU Council. Negotiations will seek to strike a balance between the strong climate action the science says is urgently required and the need to ensure an equitable transition. Brussels is also looking to a global audience, as it seeks to cement the EU’s reputation as a climate leader ahead of the UN COP26 climate talks in Glasgow, with the “Fit for 55” packaging representing the first detailed proposals to put a major economy on a path to net zero (EC Jun.4'21). Jaime Concha, Copenhagen, Ronan Kavanagh and Jay Eden, London, and Philippe Roos, Strasbourg

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