Carbon pricing and social acceptability : using EU ETS auction revenues for social expenditures in a changing world

Abstract

Achieving carbon neutrality requires increasingly stringent climate policies that, in jurisdictions with an emissions trading system (ETS), may lead to higher carbon prices, affecting industries, end-users and households. In the last few years, a rising carbon price trend has emerged in the leading carbon markets, which may partly be attributed to higher ambition. This rapid increase has provoked concerns about the social acceptability of more stringent climate policies among the population vulnerable to price changes. These concerns have been fuelled by the rise in energy prices, particularly after the outbreak of the war in Ukraine, which may hit the poor and jeopardise the successful post-pandemic recovery. The viability of more stringent climate policies and the achievement of the climate neutrality goal also depend on the (re)distributional impacts of such policies and the way the population perceives these impacts. In this context, an ETS can play a role by raising revenues that can be used for redistribution purposes. It is, therefore, relevant to examine ETS revenues and the related expenditures performed by the governments. The EU provides a relevant case study. In 2022, new policies aiming at putting the EU on track to climate neutrality were agreed. This climate ambition was confirmed despite concerns about the high carbon price in the EU ETS and the distributional impact of high energy prices triggered by the invasion of Ukraine by Russia.