Four flaws with the EU’s new climate plans

New EU climate plans risk doing further social and economic damage to the bloc

Last week, the European Commission presented its so-called Fit for 55 proposals, a raft of legislative initiatives intended to adapt EU law to the 2030 target of reducing CO2 emissions by 55 percent from 1990 levels. The idea is to adapt legislation originally intended to achieve a 40% reduction.

This undertaking, however, is marked by serious shortcomings. Herewith, I summarize what’s wrong with it, listing four main flaws.

  1. The European Commission is employing a top-down approach, riddled with taxes and spending 

The European Commission seems to take former U.S. president Ronald Reagan’s characterization of “government’s view of the economy” as a manual, rather than as a warning. As Reagan summarized government’s approach: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Most remarkable here is the Commission’s intention to impose a de facto ban on gasoline and diesel cars by 2035, even if France seems keen to extend this until 2040. When even France is less restrictive, you’re not in a good place. Feeling the need to resort to outright prohibition, the Commission is clearly not putting great trust in innovation to come up with economically efficient, CO2-neutral cars.

A notable change is the expansion of the EU’s cap and trade scheme, which puts a price on emitting CO2 but allows companies to buy and sell their right to do so. The Commission wants to expand this so-called Emissions Trading System (ETS) – set up 16 years ago and covering power plants, intra-EU aviation, and energy-intensive industries – to include buildings, road transport, and shipping. The expansion would start gradually in 2023 and be phased in over three years, as the emission-rights regime for aviation is being tightened up and sectors not covered by ETS are made subject to emission-reduction targets, with binding targets per member state. EU minimum excise-duty rates on various energy sources, like motor or heating fuel, would also need to be increased, and a jet-fuel tax would need to be introduced on intra-EU flights, on top of a tax on maritime fuel.

Opponents of the proposals, which still need to be approved by both EU member states and the European Parliament, include the shipping industry, which hasn’t exactly welcomed its inclusion into the ETS system. The International Chamber of Shipping described the proposal as “an ideological revenue raising exercise, which will greatly upset the EU’s trading partners,” as it would involve “non-EU shipping companies to be forced to pay billions of euros to support EU economic recovery plans.”

This doesn’t even account for another part of Fit for 55, whereby the Commission intends to create the world’s first carbon border tariff, to be levied on imports of goods including steel, cement, and aluminum, to be phased in from 2026. This step is deemed necessary because two-thirds of CO₂-emissions are likely to continue, only now outside of the EU, causing “carbon leakage” – a phenomenon notably hard to estimate, although we know that China has long outpaced the U.S. and the EU in terms of carbon emission.

In response, Belgian employer federation VBO-FEB issued a warning about this “carbon border adjustment mechanism,” stating that “policy makers must be careful that (…) this will not cause other countries to impose countermeasures or cause supply chain distortions, leading us to import more finished products than raw resources.” The question remains as to whether this is not a protectionistmeasure in violation of the WTO agreement – especially when certain European producers would be exempt. In any case, it will unleash lots of extra bureaucracy, especially for small companies.

Also in line with Reagan’s description of government thinking is the European Commission’s plan to spend billions of euros to compensate for the damage done by its own measures – such as its proposal for a new “social climate fund” “to prevent fuel poverty,” using one-fifth of ETS revenue, on top of another fund, the €100 billion Just Transition Mechanism to help coal-dependent countries like Poland make the transition away from coal. Combined with the Commission’s demand to get at least 50% of the income derived from the new ETS transport and buildings revenue, this would mean that the ETS system would morph into an outright EU tax – a dream eurocrats have been pursuing for years.

  1. The proposed measures disproportionately hurt the poor

The European Commission itself has admitted that measures like putting a carbon price on heating fuels “will not affect households equally, but would likely have a regressive impact on disposable income, as low-income households tend to spend a greater proportion of their income on heating.” It is testimony to how divided opinion is even within the Commission, where many are questioning the rather extreme approach of EU Climate Commissioner Frans Timmermans.

The predicted hardship for the poor then serves as yet another excuse to spend money – now to alleviate the damage done by the measures. The Commission is seemingly unaware that to finance spending, taxes are needed, and even corporate taxes are ultimately disproportionately borne by low-skilled workers. There is no free lunch, even when paying tribute to the Climate Gods.

Over the last few years, as exemptions for the CO2 emission-trading system have been reduced, this scheme has put upward pressure on energy prices, so it can be feared that this will cause more damage to the economy, particularly hurting the poor. The Commission thinks that CO2 prices in Europe will increase by 50 percent by 2030 if its plans are implemented – but some hedge funds already project an increase of almost 100% by the end of this year, with the more modest current arrangement in place.

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July 21, 2021 at 09:32AM

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