Polluters should pay into the EU budget – but how?

As usual, much attention on the recent EU budget proposal for 2021-2027 has focused on how the money will be spent. But where the funds come from and who will pay for Europe’s carbon-free transition is just as important. The European Commission rightly proposes that polluters also contribute to the future EU budget, but how effective are these proposals?

On 2 May 2018, the Commission proposed new ways, or ‘own resources’, to fund the next EU budget and make up for the budget shortfall from Brexit. These include a tax on non-recycled plastic waste and the earmarking of 20% of auctioning revenues from the EU Emissions Trading System (EU ETS).

In this article, we provide a deep-dive into the latter proposal.

The Commission expects to raise up to €3 billion a year, or €21 billion over the 7-year period from the earmarking of EU ETS auctioning revenues. While this would represent a new source of funds for the EU budget, it is certainly not a new revenue stream as such. Currently, it is the national governments that receive the money from selling EU allowances, at least 50% of which they are supposed to spend on climate activities. The climate merit of using ETS revenues hence rests on how these revenues will be spent at the EU as opposed to the national level.

National versus EU use of pollution revenues

Between 2012 and June 2017, ETS revenues exceeded €18 billion, with around 80% of that reportedly spent on climate and energy related purposes. Most of the money went towards domestic projects with a focus on renewable energy, energy efficiency, and sustainable transport programmes.

As regards the next EU budget, the Commission proposed to increase the proportion of climate related spending from 20% to 25% (the European Parliament has called for 30% and French president Macron has pushed for 40% to be spent on the green transition).

In other words: the proposed climate spending under the EU budget will amount to something between a third and a half of the spending of ETS revenues on climate and energy by governments so far. This indicates that the EU ETS revenues are better spent on climate action by Member States themselves, than by the EU, unless the share of climate spending is significantly increased or these revenues are earmarked for a dedicated climate programme under the EU budget.

Volatile EU ETS revenues

The carbon price under the EU ETS has fluctuated widely, from €30 per tonne of CO2 in 2008, down to below €4 in 2016 and up to €14 recently, which has also made ETS revenues highly volatile. Introducing a carbon floor price can help ensure that the EU ETS becomes a predictable source of revenue. It would also guarantee that EU ETS revenues become a truly new revenue stream for the EU budget rather than a mere diversion of existing money from the national to the EU level.

Several countries have already expressed interest in a carbon floor price. At the One Planet Summit last December, five European countries (the UK, Germany, France, Sweden and the Netherlands) committed to a more meaningful carbon price in relevant sectors. Last year, the Dutch government agreed to introduce a national carbon floor price rising to €43 in 2030 to steer its power sector away from coal, and president Macron has also been advocating for a minimum carbon price in the EU.

The verdict

The Commission’s own resource proposal kicks off an important debate on who pays for the EU’s budget. There is certainly a need for a price on pollution from plastic and carbon, and polluters should also financially contribute to the climate-friendly transition of the EU. But redirecting EU ETS revenues from the national to the EU budget does little to ensure that this money benefits climate unless EU’s climate spending is significantly increased. Establishing an EU wide carbon floor price and using the extra income for the next EU budget would be a better solution that ensures that the EU ETS becomes a predictable and new revenue stream to fund Europe’s long-term budget.