EUKI Interview: How ETS2 will Affect Central and Eastern Europe

What should citizens in Central and Eastern European countries expect from ETS2? How much of a financial burden is it placing on them?

Jonas Sonnenschein: In the first few years, the new scheme will only slightly increase diesel and petrol prices and the cost of heating oil and gas. Many people will hardly notice the increase, but it will severely impact the lowest-income groups, because they spend a much larger share of their income on energy. In absolute terms, higher-income households will have a higher energy bill under the new ETS2 system because they use more energy, are more mobile and have larger cars and homes.

András Lukács: ETS2 is beneficial for the Central and Eastern European countries and an incentive for governments because they will receive more money from the European Union than the amount paid by citizens for the increased prices of fuel and gas. That’s one issue. The other is the question of how the money is spent. Poor people should be compensated. But that is a very difficult task, because who should receive this support, and how much?

Fossil fuel prices will increase immediately once ETS2 is in place. However, the investment necessary to reduce energy consumption takes time. Most of Hungary’s four million households live in very energy-inefficient buildings. Making them energy-efficient will take years, if not decades. In terms of transport poverty, most poor people in Hungary don’t own a car or, if they have one, they don’t use it often. The richest 10 per cent of the Hungarian population spends about 10 times more on petrol and diesel than the poorest 10 per cent. And poor people often still use wood for heating, which is not sustainable either.

What is the situation in Slovenia?

Jonas Sonnenschein: Slovenia is a very rural country, where people depend on their cars much more than in countries with a more urban profile. We have a big problem with transport poverty: The poorest households spend 40 per cent and more of their disposable income on private transport if they own a car. In general, energy poverty is at a very low level in Slovenia, but among older single-person households, especially older women, it is a real problem.

What level of carbon prices should be expected and where will the money from the Social Climate Fund go?

Jonas Sonnenschein: In our publication Preparing for ETS2 and the Social Climate Fund in CEE, we cite a wide range of possible carbon prices of 50-350 euros per tonne of CO2 by 2030. However, these estimates do not consider political factors such as the current situation in the Middle East. Moreover, the system includes mechanisms like the auctioning of additional allowances to prevent price surges from the start.

The revenue from auctioning ETS2 allowances should be wisely redistributed to support lower-income households in their transition to electric cars, heat pumps, etc., reducing social and income inequalities and creating incentives to invest into lower-carbon mobility and heating sources. So I think the ETS is a very good instrument because vulnerable groups need support and it helps to reduce our dependency on fossil fuels.

The main advantage of the system lies in generating a revenue stream for governments that is ringfenced for a specific purpose. Money from the ETS2 will not go to the general budget; instead, it should support the transition to green energy and transport, especially for vulnerable households. There may also be scope to use these funds to assist a wider group through direct payments. However, this could be quite challenging, due to the technicalities of delivering a direct payment scheme.

András Lukács: I think that compensation payments are the most effective means to buffer the costs for households. For transport fuels, compensation schemes or subsidies would be easy to implement. For heating fuels, this would be much more complicated. We are currently working on a study on how to implement a reform of subsidies on heating fuels. Alongside financial compensation, the money should also be spent on investments in energy efficiency.

Jonas Sonnenschein: Compensation is one of the few issues that we often debate in our project group. Financial compensation can boost the popularity of this type of carbon pricing. However, I don’t think that people will use this money to invest in decarbonisation. What’s more, the additional carbon price will never be a sufficiently strong incentive by itself to trigger investment in low-carbon technology. So we need complementary measures to decarbonise the building and road transport sectors. It could be subsidies for heat pumps for houses that are already fairly well-insulated, subsidies for solar power or for electric mobility in rural areas where there is no public transport, and so on. Vouchers are another alternative. They have the advantage over cash transfers that they are limited to certain products or services such as public transport, biomass heating fuels or repair services.

How do you expect ETS2 to be perceived in Hungary and Slovenia?

András Lukács: The ETS system can only survive if it gains public support. So if there is a feeling that people will only be paying more and not gaining any benefit, the system will not have the support it needs. People will tend to protest and, furthermore, they will certainly be manipulated by interest groups to oppose the system.

Jonas Sonnenschein: At least in the first few years, consumers in Slovenia will most likely not notice any big difference. That may also be the reason why ETS2 has not sparked any real public debate yet – unlike in countries such as Poland, which is also a project partner, where ETS2 is currently the subject of intense political polemics among its opponents.

András Lukács: Yes, everything depends on how the revenues are used. If they are used properly to compensate people, then I am sure there will be public support. However, the situation is quite complicated in Hungary, because the gas and electricity prices for private consumers are fixed at a low level. So the government spends a lot of money on compensating the gas and electricity companies and has conveyed the message for many years that it supports its people by subsidising the prices of these fuels. Unfortunately, in the current crisis, the government has reduced the excise duty on fuels, which is a highly populist move.

There is an increasing amount of misinformation about climate change and the need for mitigation. One of your work priorities is to debunk these myths. What is your advocacy strategy?

András Lukács: This problem is not new and we have been fighting it since our organisation was founded 37 years ago. We have excellent communication experts and organised numerous information campaigns. However, we always come to the same conclusion: Without adequate financial resources, it is almost impossible to meaningfully counter misinformation – especially because it spreads much faster, sometimes thousands of times faster, than accurate information. You have to be everywhere: in the traditional media, social media, advertisements and at various events. However, we don’t have the enormous amounts of money for billboards and video clips as the former government used to have. We have witnessed some very successful disinformation campaigns in Hungary, which cost vast amounts of public money.

A striking example is the former Hungarian government’s narrative that people are not paying much for energy because the government covers these costs. But the truth is that people do pay – because the energy subsidies are funded by their taxes. So we are constantly trying to counter these narratives.