On 16 September 2020 the European Union (EU) published on its website a departmental paper on EU Climate Mitigation Policy.

The EU’s Emission Trading System (ETS) limits the total amount of emissions and allows participants to trade emission permits. EU member states collected EUR 14.1 billion revenue from the ETS in 2018. Revenues go to national budgets and the ETS Directive stipulates that at least 50% of the proceeds should be used to combat climate change in the EU or third countries.

Effort Sharing Regulation

The Effort Sharing Regulation (ESR) sets out country-specific targets for non-ETS sectors. To achieve national targets, members states can introduce measures such as carbon taxes, financial support, and regulations. Governments have implemented various measures including incentives for purchasing clean vehicles and building standards. Some countries have introduced carbon taxes, although the sectors covered and tax rates vary considerably.

Green Elements of the EU Recovery Plan

The proposed Next Generation EU package focuses on green investment, with around a third of the resources earmarked for climate mitigation and adaptation. Funds for climate change mitigation are distributed to EU member states through the Recovery and Resilience Facility (RRF) and by planned top-ups to the EU budget. The resources will be funded by transfers and by an EU-wide tax on nonrecycled plastics to be implemented next year. The European Commission is also considering extending the ETS to road transport and other sectors and introducing a carbon border adjustment mechanism.

Recommendations of the Study

The study finds that the economic recovery provides an opportunity to take action to support the transition to a more sustainable economy, including strengthening carbon pricing, prioritizing investment in green infrastructure and innovation, reducing subsidies and tax exemptions for emissions-intensive activities and promoting green finance. The report suggests that more extensive carbon pricing across EU countries and sectors, combined with cuts in distortionary taxes and targeted green investment support, would allow the EU to reach the emission goals with very small effects on aggregate income.

To enhance the social and political acceptance of climate policies, part of the revenue from carbon pricing could be used to compensate the most vulnerable households and to support the transition of workers to greener jobs.

The study recommends that carbon pricing in the EU could be strengthened by expanding the emission trading system (ETS) to other economic sectors; or by applying national-level carbon pricing to sectors outside the ETS. Discontinuance of the use of free allowances would allow a more efficient use of public resources. Subsidies and tax exemptions given to fossil fuels in the EU should be discontinued.

Governments should facilitate the transition of workers to growth industries through retraining programs, targeted job-search support, and regional development assistance. The impact of higher energy prices on low-income households could be mitigated through the social support system. Research and development (R&D) support could increase research in low-emission technologies, and the development of green financing could be supported.