Who will pay for climate change policies?

The Paris climate agreement of 2015 and the UN’s Sustainable Development Goals set out an ambitious agenda for mitigating climate change, with a view to fostering human development and protecting the biosphere. Most countries have adopted them, though actual results on the ground have not been eye-catching over the last six years, Malta being no exception. 

In fact, our Energy and Climate Plan is quite defeatist on the goal of reducing greenhouse gas emissions by 19% below their 2005 levels. The Plan argues that Malta has a limited mitigation potential, arising from our service-based economy, coupled with high mitigation costs and significant socio-economic considerations.

The Plan recognises that we have a significant gap to the 2030 greenhouse gas target for sectors not covered by the EU emissions trading system. It talks about studies to identify additional domestic measures, in particular in the building and transport sectors, and quantify their expected impacts, but then adds that, for reasons of cost-effectiveness, some transfers of annual emission allocation from other Member States could be justified.

A key objective of the Paris accord was to limit future global warming to between 1.5 and 2˚C above pre-industrial levels. The average price of emissions worldwide is currently only about $3 per ton of CO2, well below the price of some $50-$100 per ton needed to reach country emission pledges, which represent about one third of the emissions reduction needed to achieve under 2˚C. Among the main barriers to ambitious carbon pricing reforms are concerns about their impacts on poverty and inequality.

Everybody knows that climate change threatens to undermine efforts to eradicate extreme poverty. Yet, policies to combat climate change could themselves impose a financial burden on the poor.

The IMF has projected poverty rates until 2050 and assessed how they are influenced by mitigation policies consistent with the Paris 1.5 °C limit. The organisation has estimated that, without progressive redistribution, climate policies would push an additional 50 million people into poverty worldwide, hamper progress towards universal access to clean energy, and head to higher food prices caused by land-based mitigation measures.

Poorer households are more vulnerable both to climate impacts and to mitigation policies themselves, not just in the developing countries but also in disadvantaged sectors of society in developed ones. The challenge applies to Malta as well.

Poorer households are more vulnerable both to climate impacts and to mitigation policies

An ambitious and effective climate policy needs a balanced framework. Many European organisations have warned that the EU’s objectives can only be reached if regulation, standards and market mechanisms are deployed simultaneously. The latter are essential to set price signals to market actors, and to change investment and behavioural patterns.

However, this is far from the case in road transport and buildings. Decarbonisation in these two sectors has lagged badly in Malta and they need to embark on a more radical path. Both have market rigidities, in that their emissions do not respond to price signals. Since electrification of personal and public transport will take time to become the prevailing mode, there will be a period when consumers will face a higher carbon price while locked into fossil-fuel-based systems with limited alternatives. 

Moreover, market price signals have massive, regressive, distributional effects, disproportionately affecting low-income households, for whom fuel and transport consume a higher share of their income. These two items alone have a weight of 25.4% in Malta’s Retail Price Index. Low-income households also have less capacity to change, since while low-carbon products (electric vehicles, rooftop solar panels and so on) may have low operating costs they tend to have high, upfront capital costs, presenting a hurdle for households with little access to cheap capital. 

The various government schemes to subsidise installation of solar panels and the purchase of electric or hybrid cars are, of course, a beginning. They need to be intensified. But, to my knowledge, we have no national carbon trading in Malta. Instead, Malta has reached a bilateral agreement with Bulgaria to buy the latter’s extra emissions-reduction points. What it costs us is unknown, though MP Jason Azzopardi has claimed that we are paying an annual €180,000.

What concerns me most, here, is that a key element of the ‘Fit for 55’ package launched by the European Commission a week ago is a new emissions-trading system (ETS) for fuel distribution for road transport and buildings. This would be the first time carbon markets would have a direct effect on the population.

But is Malta ready for the package? Are we thinking about the distribution features of the ‘just transition’ that the Commission talks about? Looked at through a distributional lens, the apparent ‘level playing-field’ of an EU-wide carbon price, in critical sectors with a direct impact on consumers, will have massive effects on inequality. The EU is far from a social level playing field and a single price will have a different effect on the population in Malta than in Luxembourg.

Consumers, in particular those on lower incomes, often have insufficient information about available low-carbon alternatives. Those in a precarious situation also have a short-term planning horizon and so discount potential, long-term cost savings. And here a malfunctioning carbon market can be compounded by ill-conceived regulation, such as weight-based emission standards favouring SUVs while penalising small petrol vehicles. For low-income households the priority would be changing their old polluting cars into more fuel-efficient ones, calling for a thorough re-regulation of the second-hand-car market. 

So, how would the revenue generated by the EU’s carbon pricing scheme in Malta be used? Would it go into the Government’s coffers and be used for general purposes? Or would it be redistributed? If the revenues are used in a distributionally neutral way, richer households would accrue a substantial part of the revenues, while low-income households would only be partly compensated for their higher expenditures for energy and food. 

If, on the other hand, the carbon pricing revenues are redistributed in a progressive way (implemented as an equal-per-capita climate dividend), the side effects of mitigation policies on poverty would be substantially reduced.

Prime Minister Robert Abela said in parliament recently that the post COVID-19 economic recovery plan will have a strong focus on the environment and that more than half of the funds will be allocated towards achieving environmental goals.  All well and good, but the devil is in the detail.

Like other Member States, Malta will have to submit a Social Climate Plan together with its National Energy and Climate Plans by 2024, identifying vulnerable social groups and measures. I, for one, look forward to a thorough discussion of this well ahead of the time.

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