E-quality: Shaping an Inclusive Energy Transition

The new study ‘E-quality: shaping an inclusive energy transition’ carried out by Eurelectric with the scientific contribution of the Enel Foundation, and analytical support from Guidehouse and Cambridge Econometrics, outlines several remedial solutions that could be considered to cushion the effects on vulnerable households, while ensuring sustainable growth for the benefit of all. Climate policies are likely to impact harder on the low-income population in the short term, unless they are accompanied by targeted mitigating measures.

 

The COVID-19 pandemic has triggered an unprecedented economic crisis and prompted a potential 7% decrease of the EU GDP. As a consequence, the massive risks of a protracted recession and unemployment are likely to affect the population, leading to an increase of structural inequalities. As the climate emergency was not put on hold by the current crisis, a socially just and inclusive energy transition is paramount for bringing citizens on board, and alleviating possible negative effects while enhancing the positive ones, especially on low-income population.

“Mitigating the negative social impacts from climate policies is essential to ensure broad support for the energy transition. This new study shows that negative effects can be offset with targeted policies and gives concrete examples of policies that can be considered for this purpose,” said Magnus Hall, Eurelectric’s President.

By analysing concrete policies already implemented by administrations across the world, the study presents the key measures that can fully offset the regressive effects of climate policies, paving the way for a successful energy transition.

First, the study finds that well planned and adequately financed long-term retraining programmes can offer concrete options for workers, thus combating the unemployment related to the transition.

Similarly, to the Scottish Transition Training Fund, which supported the reskilling of workers from the oil and gas sectors, the EU Just Transition Fund (JTF) can be a key mitigating tool to address an asymmetric job shift, particularly in the coal regions.

Second, compensation funds, in the form of lump-sum transfers or tax reductions, are a viable action to reduce the burden on population. The study identified that a lump-sum direct rebate option, recycling the revenues from key decarbonisation policies—including carbon pricing and fossil fuel taxes—would see an average sum of EUR 260 going to households across the EU every year. With this amount, the dispensable income of the badly-off households will increase by 4.2%, and by 0.8% for richest.

Lastly, and very importantly, energy efficiency support schemes directed to households will improve citizens’ standard of living, while reducing the energy use and costs. Through the Renovation Wave, the EU has an opportunity to break the barriers to the uptake of energy efficient and low-carbon solutions. Eurelectric’s study finds that by 2050 the annual financing required for the uptake of energy efficiency measures amounts to EUR 1-3 billion for the EU as a whole.

“The new normal for all systems is characterised by climate change and rising inequality, lately magnified by the effects of COVID-19 crisis. We need to seize the moment and bounce back stronger thanks to an inclusive energy transition reinforced by a well-balanced package of decarbonisation policies. This study shows that it is certainly possible and of paramount importance for all,” said Carlo Papa, Managing Director of the Enel Foundation.

This study combines detailed economic modelling with an assessment of existing policy best practice approaches to analyse the distributional effects of the EU’s key decarbonisation policies until 2050, and identify measures that could be put in place to mitigate the potentially regressive effects. The results will help policy makers to better understand how climate policies will affect different sections of the economy and provide best practice examples of policy tools which could be deployed to ensure the decarbonisation of the EU’s economy is fair and equitable. The analysis includes an assessment of the short-term effects of the macroeconomic shock linked to COVID-19 on the combined policy options.

The study uses modelling and lessons learnt from case studies, testing the possibility to off-set the negative effects of six decarbonisation policies aiming at 95% CO2 emissions reduction by 2050; It looks into the macro-regional impact of each policy on the economy (GDP), on jobs and on house-holds income in 2050.

The six decarbonisation policies analysed were: 1. carbon pricing; 2. taxation of energy vectors; 3. emission performance standards; 4. subsidies for low carbon technologies; 5. phase out of fossil fuel subsidies and 6. energy efficiency measures.

Four mitigating options were selected. These are: 1. long-term job-retraining programmes; 2. reduction of taxes/VAT/taxes on electricity bill or lump-sum transfers on a per head basis; 3. targeted energy efficiency schemes, with a focus on low-income households; 4. fund subsidies for low carbon technologies.

 

Key findings

The key decarbonisation policies needed for Europe to achieve its climate goals will have a mix of progressive and regressive effects. Some policies will result in lower-income households financially benefiting more than other income groups (progressive effect), while others will result in lower income households being disproportionately burdened by costs (regressive effect).

Decarbonisation policies which directly increase costs such as energy taxes have the most regressive effects (if implemented in isolation), while policies that reduce costs or energy consumption such as energy efficiency measures are more progressive.

A number of policy options exist that could effectively reverse the regressive effects of the decarbonisation policies so that the net effect is progressive. In other words, it is possible for decarbonisation policies to both help achieve needed climate while addressing inequality issues.

The study identifies four key policies which could be introduced to counteract the regressive effects of climate policies. The four options are:

1. Lump-sum transfers or equivalent tax relief measures. Direct financial rebates to citizens have already been applied by jurisdictions such as Switzerland and Canada as an effective way to recycle the revenues raised from revenue – generating decarbonisation policies (such as carbon pricing) and reduce inequality. In an EU4 context, the study identified that a lump-sum direct rebate option recycling the revenues from key decarbonisation policies—including carbon pricing and fossil fuel taxes—would see an average sum of EUR 260 going to households across the EU every year. This amount represents a 4.2% increase in household disposable income for the lowest-income households and an 0.8% increase for the highest-income households. For jurisdictions where a direct rebate would not be politically feasible, the recycling of carbon revenue to offset reductions in taxes such as value added tax (VAT) or taxes on electricity bills would also be a viable alternative resulting in similar financial benefits to lower-income households.
2. Targeted energy efficiency measures. Leveraging the policy and institutional infrastructures that exist throughout EU countries in the form of energy efficiency obligation schemes and subsidies that direct more funds to low-income households and ensure future energy savings. The programmes should include upfront subsidies to help overcome the initial investment costs which are often barriers to implementing energy efficiency measures for the most vulnerable households. The financing could leverage recycled revenue raised from decarbonisation policies and/or could be co-funded through government funding. The amount of funding required is 1–3 billion EUR per annum for the EU as a whole.
3. Job retraining programmes, focused on industrial sectors impacted by decarbonisation. This is a preventative option that aims to stop people from falling into poverty due to the significant shifts in the economy that are needed to achieve carbon neutrality. Programmes should be set up early and pre-emptively to reskill and upskill workers, while reflecting the impacts on the local labour market conditions. Programme administrators should work with industry to identify labour shortages and reskill workers to fill gaps in these sectors, and leverage the job creating potential from the energy transition and digitalisation. Funding can be via carbon revenues or general tax revenue.
4. Fund low-carbon technology subsidies via general taxation or carbon revenue. Low-carbon subsidies are a progressive decarbonisation policy, if not funded through a surcharge on electricity users. This study finds that the costs for low-carbon technology subsidies could be balanced more equitably by funding subsidies for low-carbon technologies, such as renewable energy support schemes, through rising income tax rates for high incomes or carbon revenue earmarking, rather than through a surcharge on electricity consumption.

These policy options could increase the longevity of climate policies by achieving greater public acceptance. Policies that increase income equality are more likely to maintain public support and options such as the direct lump-sum rebate approach can make a very visible point about the potential for decarbonisation policies to reduce inequality. Furthermore, the policy options identified by the study do not face significant legislative barriers in their implementation, as many are within the powers of the EU member states and/or align with EU directives such as the Energy Efficiency Directive (EED). As these policy options are administratively straightforward to implement, the infrastructure and institutional capacity required are often already in place.

“What is needed now is the political will and ambition to act and make the changes needed to address the distributional impacts of the critical decarbonisation policies the EU needs to combat climate change. The energy transition can and should be a just one for all citizens of Europe,” Eurelectric underlines.