Recycling Carbon Revenues for Energy Efficiency

Within the European Union (EU), leaders are currently aiming to set a net-zero carbon emissions target for EU economies for 2050 [3]. Even though various carbon pricing schemes (carbon taxes, emission trading systems) are already/being adopted, their scale and ambition is not yet consistent to meet the necessary zero carbon emissions targets. Hence it is not only important to debate about the carbon prices but also crucial to understand how their contribution will be significant if the focus shifts towards how carbon revenues are spent.

According to the International Energy Agency (IEA), the EU could raise over €230 billion of carbon revenues between 2015 and 2030 [4]. These could help in accelerating the energy transition.

This memo is for the French Member of Parliament (MEP) to his/her fellow European MEPs to make a strong case to channel carbon revenues towards key climate mitigation policies and their implementation – in particular Energy Efficiency. This memo will explain how a carbon tax will not be socially acceptable if people do not see that the government is also acting to help individuals, business and communities to address the main objective of carbon tax: reducing the carbon footprint.

Approach and Results

The approach included a literature review about Energy Efficiency and its potential as an essential climate mitigation strategy to meet the Paris Agreement, its barriers and also a parallel analysis into how carbon revenues are being recycled with few case studies.

Energy Efficiency First

The Low Energy Demand Scenario released by the IPCC report [5] is the most feasible and affordable scenario to achieve the Paris Agreement.

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According to this scenario, around half of the energy-related GHG reductions necessary to deliver a 2-degree pathway is expected to come from efficiency. In addition to the greenhouse gas reductions, energy efficiency provides multiple benefits [6]. In general, it is believed that energy efficiency is complex and granular, invisible and small scale and delivers best only when a specific set of knowledge and capacities are in place. Energy efficiency policies require a long-time horizon with considerable investment to transform markets. Since investment in energy efficiency is a least-cost strategy in comparison to other decarbonisation options, energy efficiency is crucial to reduce the negative impact of increasing carbon prices. Since carbon revenues are a source of stable funding, this will be ideal for these efficiency programs. A RAP study [7], which analysed years of energy efficiency expenditures in the U.K., showed that investing carbon revenues in proven efficiency programs can save seven to nine times more carbon for a given price rise than just instructing users to consume less through higher energy prices. Positive effects of energy efficiency were also studied through numerous examples from Germany [8], France [9], Czech Republic [10], USA [11], Sweden [12] including others. In sum, there is a strong need to design the interaction between energy efficiency policy and carbon prices to be complementary as possible.

Lump-sum per-capita redistribution of carbon revenue is crucial to public acceptability of a strong carbon price and create vested interests in its creation and maintenance

Some experts argue that carbon revenues should not be earmarked for a specific purpose [13]. However, evidence has found that public will not support carbon pricing if the revenues only flow into a government’s general budget. Research [14] has shown that earmarking the revenue and directly redistributing it to citizens and homes can be well-received. For example, carbon revenues can be used for supporting vulnerable groups (e.g. low-income households) to ease the low-carbon transition, developing public infrastructure, reaching international climate finance commitments, increasing economic activity and the realization of savings by households and businesses by encouraging an improvement in energy efficiency. With the use of carbon revenue recycling as a strategic tool, European Member States will be able to drive low-cost savings into their economies and more easily reach the carbon targets and also be prepared to achieve the net-zero emissions target by 2050.

Implications and Recommendations

Based on the above findings, we call on the European and Member State decision-makers to

1. Directly link a steady income stream from carbon revenues to much-needed energy efficiency investments to accelerate the power sector decarbonisation and modernisation
2. Support a “Carbon Dividend” to be given directly back to the citizens to support a just transition that leaves no one behind. This may help mitigate social and economic challenges that may occur during the transition away from the fossil economy
3. Communicate the progress to the public to encourage transparency while demonstrating the effectiveness of carbon pricing and revenue spending policies
4. Encourage companies to introduce carbon pricing across business and to invest in reducing carbon emissions

Conclusion

Increasing investments in energy efficiency in Europe would not only advance socio-economic and environmental goals but also and permit more rapid progress towards decarbonisation while advancing European energy security and competitiveness. Harnessing carbon revenues to accelerate progress on carbon reduction is a powerful mechanism to achieve these goals.

References

1. https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
2. https://unfccc.int/files/meetings/paris_nov_2015/application/pdf/cop_auv_template_4b_new__1.pdf
3. https://ec.europa.eu/clima/policies/strategies/2050_en
4. International Energy Agency (IEA). 2014. World Energy Investment Outlook.
5. https://report.ipcc.ch/sr15/pdf/sr15_spm_final.pdf
6. https://www.iea.org/publications/freepublications/publication/Multiple_Benefits_of_Energy_Efficiency.pdf
7. https://www.raponline.org/wp-content/uploads/2016/05/rap-leesbayer-eeotoolkit-2016-feb.pdf#page=46
8. Neme, C., Seefeldt, F., Offermann, R., Gottstein, M., Echternacht, D., Moser, A., & Weston, F. (2014). The Positive Effects of Energy Efficiency on the German Electricity Sector. Available at: http://www.raponline.org/document/download/id/7311
9. http://www.gouvernement.fr/gouvernement/systeme-d-echange-de-quotas-d-emission-de-gaz-a-effet-deserre-periode-2013-2020-0
10. https://www.sfzp.cz/en/administered-programmes/new-green-savings-programme/
11. https://www.rggi.org/investments/proceeds-investments
12. https://www.government.se/government-policy/taxes-and-tariffs/swedens-carbon-tax/
13. http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2015/11/Bowen-policy-brief-2015.pdf
14. https://www.tandfonline.com/doi/abs/10.1080/14693062.2015.1058240?journalCode=tcpo20