MacroPolis

The European Green Deal (EGD) is essentially the EU’s development strategy for 2050. Its central goal is for Europe to become, by the middle of the century, the first climate-neutral continent, namely, to reach a point where greenhouse gas emissions from all sectors of the economy are fully offset by carbon dioxide removals, either naturally or through various technologies.

In addition to achieving climate neutrality, the EGD seeks to conserve biodiversity; the latter is of undisputable importance and provides an adequate ecosystem for man, while constituting a buffer against the climate crisis.

Importantly, the EGD also sets a horizontal goal: implementing the structural changes that are necessary to reach a zero carbon footprint by 2050 -across all sectors of the economy- without 'leaving anyone behind'. Acknowledging the shocks that the transformation of the European economy will bring to Member States’ societies, the EGD seeks to ensure that it takes place in a socially just way.

A transition that is both green and just for all: is this wishful thinking or a realistically achievable outcome?

Successive crises and skepticism

As a matter of fact, from the outset, many deemed the EGD to be rather unrealistic. Not even three months after its announcement in December 2019 by Ursula von der Leyen, the then newly-appointed head of the European Commission, the coronavirus pandemic broke out. The public health crisis was soon accompanied by an economic one; the complete scrapping of the EGD and a return to the 'safety' of business as usual at all levels was then considered by many as the only way to safeguard the European economy against irreparable damages. The tremors in the European political structure were strong.

Nevertheless, after intense and remarkably rapid -by EU standards- deliberations, Europe provided clear responses to deflate this alarmism. Perhaps the clearest of all was the European Climate Law, which made achieving climate neutrality by 2050 legally binding, while setting a more immediate climate goal for 2030, namely, the reduction of net greenhouse gas emissions by at least 55% compared to 1990 levels. Thus, this law raised the bar of climate ambition by almost 15 percentage points compared to the previous 2030 target (40% emissions reduction in 2030 compared to 1990).

Nonetheless, while Europe was engaged in a race to finalize the 'fit for 55' legislative package that would make the European Climate Law's commitment to reduce net emissions by 55% by 2030 a reality, Russia's war in Ukraine and the unprecedented energy crisis that accompanied it came to disrupt the European path towards climate neutrality once again. Conservative voices across Europe were calling for an immediate return to lignite and coal instead of clean energy to compensate for the “shortfall” of Russian fossil gas, on which the European continent had been deeply dependent until the war broke out. Given that lignite and coal are by far the most polluting fuels on the planet, this shift, which many presented as a one-way street, would de facto scrap the EGD climate targets.

Once again, the EU gave a convincing political response. Following Russia's invasion of Ukraine, it promptly announced the REPowerEU plan, the main aim of which is to wean Europe off imports of Russian fossil fuels. Of the €300 billion package put together to achieve this goal, €288 billion has been earmarked for the acceleration of renewable energy sources (RES) development, the electrification of heating via heat pumps, and the development of infrastructure for both the production of green hydrogen and biomethane and electricity storage. Thus, despite those advocating for an urgent need to return to fossil fuels, REPowerEU came to accelerate the green transition, for the most part extending the ambition of the 'fit for 55' package under preparation.

Nonetheless, even after gas and electricity prices returned to manageable levels, the EGD still faced challenges. The strong push to withdraw the Nature Restoration Law by conservative political groups in Europe is a case in point. Similarly, both the withdrawal of the European Commission's proposal for a drastic 50% reduction of pesticides by 2030 and the long delay in tabling the legislative framework for Sustainable Food Systems -a key pillar of the Farm-to-Fork strategy- served intensive agriculture interests.

Individual member states have also disapproved of different EGD aspects. For instance, there were reactions to the new law on 'greening' heating in Germany; despite the opposition, the law was finally adopted, thanks to a coalition of Greens, Socialists, and Liberals.

However, the greatest trial for the EU’s Green Deal might lie ahead of us. In 2027, a new Emissions Trading System (ETS-2) will come into operation exclusively for the building and road transport sectors. This new emissions trading scheme will be distinct from the existing ETS (ETS-1), which has been in operation since 2005 and regards electricity generation, energy-intensive industries, aviation within the European Economic Area, and shipping (from 2024 onwards). The ETS-2 will set a price for each ton of carbon dioxide emitted from the use of fossil fuels in buildings and road transport in exchange terms. This cost will burden fossil fuel suppliers, who will in turn pass it on to consumers. Therefore, from 2027 onwards, oil or fossil gas for heating, as well as petrol, diesel, and CNG for cars, will become more expensive.

As heating and transport costs are a key part of the household budget, the ETS-2 is expected to have a significant social impact, especially on the most vulnerable. It is no coincidence that the introduction of the ETS-2 constituted the most thorny issue during the last revision of the Emissions Trading Directive, which took place during the turbulent period of the energy and geopolitical crisis. Despite a fiery debate among political groups, ETS-2 was finally incorporated into EU legislation thanks to the insistence of Peter Liese, a German rapporteur of the European People's Party.

However, why was it deemed necessary to introduce a new, separate emissions trading scheme for these two sectors, given the expected social consequences?

Why is a new emissions exchange for buildings and road transport necessary?

The answer lies in these two sectors' key contribution to meeting the climate targets, as well as in the evolution of their emissions thus far. According to the latest official data available (2021), road transport and buildings account for 35% of total EU greenhouse gas emissions. What is more unsettling, emissions from these two sectors are not decreasing at a rate consistent with meeting the European net emissions reduction target (at least -55% in 2030 compared to 1990 levels).

As illustrated in Figure 1, the EU-27 and Greece not only did not reduce but increased their emissions from road transport in 2021 compared to the base year (1990) by more than 20%. Moreover, Greece presented a much larger peak than the European average in 2009, when emissions exceeded those of 1990 by almost 80% before returning to lower levels in 2013, mainly due to the economic crisis that hit the country. From 2013 onwards, and except for the particular year of the pandemic (2020), road transport emissions in both the EU-27 and Greece have remained effectively stagnant at 120% compared to 1990.

Figure 1: The evolution of road transport emissions in the EU-27 and Greece as a percentage of 1990 emissions.

Emissions coming from buildings in the EU-27 are slightly improved, as in 2021 they represented 72% of 1990 levels (Figure 2). Nevertheless, in recent years, this sector’s carbon footprint also appears stagnant with no signs of amelioration. On the other hand, as the figure reveals, Greece has been performing worse than the European average; emissions from the buildings sector followed a steady upward trend until the mid-2000s, peaking in 2003 when they more than doubled 1990 emissions and, subsequently, markedly decelerating during the period of the great economic crisis. However, despite the energy-saving policies that started to be implemented in Greece in the previous decade, the reduction of emissions from the building sector has been subtle and fluctuating, resulting in emissions in 2021 being virtually at 1990 levels.

Figure 2: The evolution of emissions from buildings in the EU-27 and Greece as a percentage of 1990 emissions.

In contrast to road transport and buildings, the electricity production sector, which has been covered by the ETS-1 since 2005, has made significant progress (Figure 3). In 2021, emissions from thermal plants that produce electricity and heat by burning lignite, coal, gas, and oil decreased by 42% and 51% in the EU-27 and Greece, respectively. This reduction accelerated from 2013 onwards, when emission allowances that had been given free of charge to thermal plants were abolished and power companies started to bear the cost of CO2. The additional changes made to the relevant emissions trading directive have since restricted the supply of allowances on the carbon market, resulting in higher allowance prices. This, in turn, has mainly affected the most polluting plants using lignite and hard coal as fuel, thus, leading to a significant drop in emissions.

Figure 3: The evolution of emissions from the electricity and heat production sector in the EU-27 and Greece as a percentage of 1990 emissions.

The data, therefore, suggest that the inclusion of electricity production in the first Emissions Trading System potently drove the climate progress made in that sector. On the other hand, the observed stagnation and/or increase in emissions from buildings and road transport indicates that the policies implemented so far to reduce these sectors’ carbon footprint have not yielded the anticipated results. Based on this performance and aiming to accelerate the decarbonization of these two key sectors, the European Union has decided to include them in an emissions trading scheme. Furthermore, in order not to disrupt the existing system (ETS-1), as well as to better control emissions from these two sectors, ETS-2, at least initially, was set up to be independent of the ETS-1 with distinct carbon prices and targets. Thus, the target for reducing emissions from road transport and buildings is set at 43% in 2030 compared to 2005, while the target for the ETS-1 sectors is set at 62%.

Social Climate Fund and other resources

To mitigate the social impacts deriving from the implementation of the ETS-2, the European institutions launched the 'Social Climate Fund' (SCF) to be financed through the revenues from the auctioning of ETS-2 emission allowances, as well as by the Member States. The design of the algorithm for calculating both Member States' contributions to the SCF and the distribution of the total amount among them strongly favors the economically weaker. Of the total amount of € 86.7 billion to be dispersed over the period 2026-2032 across the European Union, Greece will receive 5.52% or € 4.78 billion.

Besides the SCF, Greece and the other EU-27 countries have at their disposal the substantial resources allocated to them from the auctioning of emission allowances through the ETS-1. Based on the projections of the revised ETS Directive, Greece is expected to receive auctioning revenues of approximately 137 million allowances over the period 2024-2030; modestly estimating the average allowance price at €80/t shall, therefore, result in €10.9 billion. Moreover, the significant resources that Greece has received from the Recovery and Resilience Fund as well as from the National Strategic Reference Framework (NSRF) 2021-2027 may also be used for the same purpose.

Given these facts, a key question arises: how and to whom should these resources be allocated so that the green transition in the buildings and road transport sectors proceeds in a socially just manner?

The European Union’s guidelines for approaching this fundamental question can be found in the new Social Climate Fund Regulation. Based on the latter, temporary direct income support measures to address the increase in fuel prices for road transport and heating may not exceed 37.5% of the total amount allocated by the SCF to each Member State. The remaining resources must be channeled to long-term structural investments, including building renovations; decarbonization and renewable energy integration solutions; market and infrastructure for zero- and low-emission vehicles; and use of public transport and shared mobility services.

Nonetheless, the SCF constitutes only a small part of the resources available to Greece to support households in the face of the coming challenge; the country has many degrees of freedom regarding the use of these funds.

Thus, what are the measures and policies that will best shield citizens and guarantee that the green transition is socially just?

The (counter) example of the energy crisis

The recent energy crisis that broke out in the second half of 2021 and was triggered by soaring fossil gas prices, puts forward a specific model of resource use. The energy crisis bore essentially the same qualitative challenge that we will have to face every year from 2027 onwards, when the ETS-2 will come into operation: protecting households and small and medium-sized enterprises against rising energy prices.

The analysis of official data reveals that in the 16 months between September 2021 and December 2022, when the energy crisis peaked, Greece received €10.7 billion from diverse sources, including ETS-1 revenues. This sum was allocated to a variety of crisis response measures; however, all these funds effectively constituted either direct or indirect subsidies to fossil fuel consumption. More specifically, of the €10.7 billion, €9.8 billion were direct subsidies to meet the increase in electricity and fossil gas bills, €0.8 billion directly supported the income of various categories of citizens, while the remaining €0.1 billion funded tax exemptions (Figure 4).

Figure 4: Energy crisis response: budgetary expenditures by type (left) and subsidized commodity (right) according to the data of the State Budget Report.  

Over the same period, investments promoting the reduction of overall household energy consumption were rather overlooked; the 'Recycle-Replace Appliance' and 'Save 2021' programs were financed by just €1.4 billion from the European Regional Development Fund and the Recovery and Resilience Fund.

This model of resource use can help mitigate socioeconomic impacts when priority is given to the most economically vulnerable, as was indeed the case during the crisis. However, it has two structural flaws. Firstly, it is very costly. If an energy crisis of similar intensity were to occur in the future, it would be extremely difficult -if not impossible- for the state budget to sustain an expenditure of 10.7 billion over 16 months, let alone for a longer period. Secondly, and more importantly, this model based on subsidy policies does not address the root of the issue, namely, household dependence on fossil fuels to meet energy needs within the home and for transport.

How can we protect ourselves?

It is clear that shielding households against undesirable yet probable future energy crises, as well as against the consequences of ETS-2, can be achieved through the permanent reduction of the carbon footprint of buildings and road transport, which will in the long run contribute to savings in household energy bills.

Nonetheless, the measures and policies that can be deployed to reduce these sectors’ carbon footprint differ considerably in terms of both cost and potential to reduce emissions. Moreover, the financial resources available to the state, citizens, and businesses alike are finite. Thus, a question arises: what is the optimal 'mix' of measures and policies that should be implemented in order to achieve a simultaneous cut in both emissions and household energy bills?

In an attempt to answer this question, a recent analysis considered eight scenarios for the buildings sector and two for the road transport sector. All scenarios were examined to estimate the resulting carbon footprint reduction over the period 2023-2030, as well as to determine the degree of investment required and assess their cost-effectiveness. The latter reflects the so-called 'annualized cost', which, in addition to the initial investments, takes into account the economic benefits that households will obtain from these investments over their lifetime.

The analysis of the 8 scenarios for buildings showed that the two most cost-effective scenarios combine behavioral changes and other low-cost measures (solar water heaters, energy-efficient lighting, insulation on single-glazed windows, etc.) with the installation of heat pumps, photovoltaic panels to meet own electricity needs, and shallow or deep energy upgrades. These scenarios offer a net benefit to households, namely, they produce negative annualized costs of -€6 million to -€561 million in 2030, based on a wide range of values for variables such as electricity costs and discount rates, which were examined in the sensitivity analysis carried out. Energy cost reductions resulting from the implementation of the scenario including shallow energy upgrades amount to €890 per year per household in 2030; opting for the scenario based on deep energy upgrades raises this sum to €1370.

In terms of total investment costs up to 2030, the scenario involving shallow energy upgrades for 100,000 homes per year requires €22.7 billion, while the scenario comprising deep energy upgrades for 80,000 homes per year costs €28.6 billion. Both figures match the respective ones provided by the National Energy and Climate Plan (NECP), which amount to €29.2 billion for the same period (€6.3 billion for energy upgrades and €22.9 billion for appliance purchases). However, in contrast to the study, the NECP does not place sufficient emphasis on residential upgrades.

Furthermore, these two scenarios will reduce the carbon footprint of the residential building stock by 5.6 million and 5.72 million tons of CO2 in 2030, corresponding to 57% and 58% cuts, compared to 2022, respectively.

With regard to the road transport sector, the main scenario examined closely matches the NECP, targeting an 18.5% share of electric cars in the total passenger car fleet in 2030; this scenario achieves a 30% emission reduction compared to 2022 (630 Kt CO2eq) and requires a significant total investment of €22.9 billion for the entire period 2023-2030.

On the other hand, the analysis highlights the importance of measures that have not been emphasized in the NECP, such as the reduction of speed limits on motorways, mild mobility, co-mobility, and telecommuting. The employment of these measures increases the cost by just €28 million over the same period -as compared to the pure electromobility scenario- but leads to very significant additional annual reductions in terms of both carbon footprint (812-822 Kt CO2eq) and household energy costs (€514-710 million). The simultaneous implementation of these measures together with those aimed at electromobility development could, in 2030, reduce the corresponding annual household costs by €810 million to €1,070 billion and annual CO2 emissions by up to 1.44 million tons of CO2eq.

Overall, the study found that implementing the best-case scenario measures in both sectors can, in 2030, provide households with up to €1.6 billion in annual savings while cutting both sectors’ emissions by up to 7.1 million tons of CO2eq. Nonetheless, committing to these best-case scenarios implies extensive electrification of both sectors, which in turn will require significant investments dedicated to electricity grids.

Other countries in the EU-27 are following a similar approach; for instance, the Netherlands is attempting to drastically reduce its household heating dependence on fossil gas, which in 2021 was 92%. The measures employed focus on the massive promotion of heat pumps, whose new installations increased by 110,000 amid the energy crisis in 2022 (+57% compared to 2021). This did not happen by chance; it was the result of both the ban imposed on central heating systems from 2026 onwards and a variety of financial tools and loans offering incentives to increase the electrification of building heating through heat pumps. As reflected in its NECP, the Netherlands places a strong emphasis on energy upgrades in buildings, aiming to insulate 2.5 million buildings by 2030. Through all the measures and policies to be implemented, it aims to reduce emissions from its building stock by 40% in 2030 compared to 1990 levels (from 30 Mt CO2eq in 1990 to 18 Mt CO2eq in 2030). The Netherlands is also a leader in electromobility as 30.8% of new cars in 2023 were electric, a 7.5% increase compared to 2022; furthermore, it maintains its world-leading position in terms of the density of electric vehicles and chargers per 100 km. This progress, too, has not occurred by chance; in fact, the policies and measures taken have leveled the cost of purchasing electric vehicles with that of petrol and diesel ones.

The above illustrates that social justice in the green transition can be achieved through the funding of projects that accelerate it, rather than through subsidy policies that delay it by perpetuating household and business dependence on fossil fuels; in this case too, the vulnerable must be prioritized. At present, Greece has significant resources at its disposal and sufficient time to wisely allocate them before the ETS-2 becomes fully operational; thus, its window of opportunity for a proactive policy is now.

*Nikos Mantzaris is a senior policy analyst and partner at The Green Tank

This work was carried out with support of the Embassy of the Kingdom of the Netherlands in Athens as part of a climate journalism project.