Tuesday

5th Jul 2022

How Oettinger's CO2 sell-off could fill Brexit blackhole

  • Germany still relies heavily on coal, which means it needs to sell its energy companies more ETS permits (Photo: Tobias Scheck)

How can the hole that the UK will leave in the EU budget after Brexit be filled?

The European Commissioner in charge of that budget, Guenther Oettinger, gave some examples earlier this month.

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  • EU commissioner Guenther Oettinger: 'The only non-European part is the fact that the revenues from the ETS go to national budgets' (Photo: European Commission)

He said a tax on plastics could do the trick, and despite his colleagues' doubts, is lobbying in favour of the idea.

The German commissioner also launched the idea for another potential source of revenue: the proceeds from the EU's emissions trading system (ETS).

In a speech, he noted that the member states set climate goals and targets at an EU level, and acts as one at international climate conferences, like in Paris and Marrakesh.

"The only non-European part is the fact that the revenues from the ETS go to national budgets," Oettinger said.

"I think it would make sense that proceeds from our climate protection policy, from what has been agreed in Paris and Marrakesh and what we do with the ETS should actually go to the European budget," he said.

Oettinger did not give additional information, and much of his focus afterwards went on the plastics tax suggestion.

But what would happen if the commission actually followed through on the ETS idea?

Not enough

For one, it would not be enough to plug the annual Brexit hole of between €12bn and €15bn, but it would go a long way.

In 2015, national governments received €4.9bn by auctioning ETS permits. Companies that are part of the ETS are required to hand in these permits for every tonne of CO2 they emit.

But UK companies make up a sizeable chunk of that.

Without counting the UK, the proceeds would only be €4.3bn.

While it is possible that the UK would continue to remain a part of the system, it is unthinkable that the UK government would agree that the proceeds would then go into the EU budget.

Using the ETS revenues for the EU budget would also be a big culture shock for those managing the budget.

The EU budget is agreed in cycles of seven years, and hardly fluctuates.

The ETS proceeds however can change year on year, depending on the demand for CO2 permits.

In 2014, the proceeds were only €3.2bn – or €2.8bn, not counting the UK.

The EU would have to adjust its programmes far more to a fluctuating income then it does now – just like national budgets do, said Gerben-Jan Gerbrandy, a Dutch member of the European Parliament.

"That would be very natural," he told this website in his office in Strasbourg.

"I'm strongly in favour of moving towards more own resources for the EU. Whether ETS is the best, is something to be discussed, there are others as well," said Gerbrandy, a Liberal member of the parliament's environment committee.

It is unclear how the income from the ETS will develop over the years, because it is determined by various factors.

One is that as of 2021, the number of ETS permits which member state authorities will be allowed to sell, will decrease by 2.2 percent every year.

This could mean less revenue, if the price remained the same.

Economic theories about supply and demand state that the price should go up if the permits becomes more rare, but the system has suffered a much-lower-than-expected price for years, due to the economic crisis and a subsequent glut of available permits.

Some measures to correct that will enter into force next year, but it is difficult to predict how well it will work.

Getting member states to give up revenue?

Before the commission's plan could work, it would need the approval from national governments, something which could prove quite difficult.

"That will be a nightmare to many member states," MEP Gerbrandy said.

In his argument for moving the ETS proceeds to the EU level, Oettinger said that it would be "logical".

But there was probably a political reason why in the mid-2000s, when the system was set up, it was decided that national budgets should benefit from the ETS.

"I can imagine that that was necessary to have the member states agree on such an ETS system," said Gerbrandy, who added that he was "guessing" since he was not present.

But moving the collection of ETS money from a national to EU level is just another way of increasing member states' contributions, said Gareth Goldsmith, spokesman for the European Conservative and Reformist group in the EU parliament, which is often critical of the more federalist side of EU plans.

"If you change where that revenue is collected, it is still the same money, it is just member states paying more," said Goldsmith.

"De facto, whatever way you cut it, it's increasing contributions," he added.

However, using the ETS plan would mean that contribution hikes are linked to the level of dirtiness of a country's industry and power sector.

In 2015, Germany received 22.5 percent of ETS auctioning, while France received only 6.3 percent.

This can be explained for a large part because of Germany's higher reliance on CO2-emitting coal power, compared to France's nuclear power.

ETS auctioning as a budget resource, would make Italy and Spain the second- and third-largest contributor, and would see Romania contributing more than the Netherlands.

Another feature of the ETS that could disappear is its link to other climate action.

Currently, national governments are required to spend 50 percent of the ETS revenue on measures that reduce greenhouse gas emissions.

It is possible for such a requirement to implement at an EU level as well, but the EU budget has no 'earmarking', which means that it would be difficult to check if the ETS proceeds actually went to climate action.

In fact, the whole debate about the EU budget is in part because the commission is asked to do more on other fields, like migration and security.

Commission reveals plastic tax to cover Brexit budget hole

The Commission plans a new plastic tax, and to pocket income from the emission trading scheme, for the next EU budget. It is also studying whether there are legal grounds to link EU funds to the rule of law issue.

Emissions trading deal reached after 'isolating' Poland

EU negotiators reached a deal on the ETS after breaking a deadlock on the eligibility criteria for a modernisation fund. Only Romania and Bulgaria will be allowed to use it to finance projects related to coal.

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