Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

Is Europe socially fit for the ‘Fit for 55’ package?

Béla Galgóczi 19th July 2021

The centrality of market mechanisms to the European Commission’s climate package poses big questions as to its effectiveness and distributional impact.

Fit for 55,emissions-trading system,Social Climate Fund
Béla Galgóczi

The climate policy package ‘Fit for 55’ launched by the European Commission on July 14th is ambitious and seems to put the European Union on track towards its 2030 climate-policy targets and pave the way for the 2050 net-zero-emissions goal. So far, so good.

But is Europe also socially fit for this package? Is it in line with the principle of ‘just transition’, widely shared across the union and the EU institutions? While previous efforts in this regard focused more on the employment, regional and industrial-policy aspects—the main areas covered by the Just Transition Fund established under the European Green Deal—this time the distributional features of just transition are on the table.

Key elements of the package are a new emissions-trading system (ETS) for fuel distribution for road transport and buildings—the first time carbon markets would have a direct effect on the population—and a Climate Social Fund.

Regressive distributional effects

It has been argued for a long time (by Cambridge Econometrics, the European Climate Foundation, L’Institut du développement durable et des relations internationales and the European Trade Union Confederation) that an ambitious and effective climate policy needs a balanced framework. Objectives can only be reached by the simultaneous and well-proportioned deployment of regulation, standards and market mechanisms. While these last are essential to set price signals to market actors, to change investment and behavioural patterns, they can only have the desired effects in well-functioning markets.

This is however far from the case with carbon markets—and road transport and buildings in particular. Decarbonisation in these two sectors was lagging behind the rest of the economy and they need to embark on a more radical path. But both have market ‘rigidities’: their emissions do not respond to price signals. Since the required low-carbon technologies will thus take time to become available, there will be a period when consumers will face a higher carbon price while locked into fossil-fuel-based systems with limited alternatives. 

Moreover, such signals have massive, regressive, distributional effects—disproportionally affecting low-income households, for whom fuel and transport consume a higher share of their income. They also have less capacity to change, as 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. 

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. 

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—between as well as within member states. The EU is far from a social level playing field and a single price will have a different effect on the population in Luxembourg than in Bulgaria, which has the highest fuel poverty and lowest minimum wages in the union (see figures).

Picture 1 2
Source: EU SILC, 2020
Picture 2 1
Source: ETUI/ETUC, Benchmarking Working Europe 2020

Unsatisfactory response

The proposed Climate Social Fund is a necessary, but unsatisfactory, offsetting response. The huge challenge of designing an effective and fair compensation mechanism—covering various inequalities, degrees of market accessibility and levels of market information—has been massively underestimated. Setting up a carbon market is easy; creating a proper compensation mechanism in a heterogenous, 27-member economic area is much more difficult.

The size of the fund is to be €72.2 billion between 2025 and 2032, using 25 per cent of the ETS revenues from transport and buildings, with potential match funding from the member states. This is very low compared with the challenges posed by extending the ETS in this way. The purpose of higher carbon pricing is in any event not to raise revenue but to direct market behaviour towards low-carbon technologies—there is thus a strong argument for redistributing fully the additional revenues. 

The structure of the fund also raises several questions. Only a part of it is to be dedicated to social compensation; the rest includes incentives for electric vehicles and investments in charging infrastructure and decarbonisation of buildings. Low-income households would not benefit from these measures—indeed, using the fund to support electric vehicles would disproportionally favour rich households. 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 Europe’s second-hand-car markets. 

In considering the distribution of the fund among member states, the commission has made the effort to create a formula to account for population size (including the rural share), per capita gross national income, the share of vulnerable households and household emissions from fuel combustion. But this will still not manage adequately to take within- and between-country inequalities into account. A relatively poor member state with lower within-country inequality could end up benefiting less than a rich member state with high inequality.

Member states will have to submit Social Climate Plans together with their National Energy and Climate Plans by 2024, identifying vulnerable groups and measures. How will this work, given their large differences in commitment and institutional capacity? The huge disparities among member states in how their National Energy and Climate Plans have addressed just transition in the past might provide a foretaste of what to expect.

Bela Galgoczi
Béla Galgóczi

Béla Galgóczi is Senior Researcher at the European Trade Union Institute and editor of Response measures to the energy crisis: policy targeting and climate trade-offs (ETUI, 2023).

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u42198346ecb10de1ac 2 Europe Day with New DimensionsLászló Andor and Udo Bullmann
u421983467a362 1feb7ac124db 2 How Europe’s Political Parties Abandoned Openness—and Left Populism to Fill the VoidColin Crouch
u4219834678 41e5 9f3e dc025a33b22c 1 Funding the Future: Why the EU Needs a Bold New BudgetCarla Tavares
u42198346ca b6a8621365c0 0 The European Union’s Road to AbundanceElizabeth Kuiper and Pietro Valetto
u42198ad1d4a23d5 0 How Sweden’s Welfare Experiment Became a Warning to EuropeLisa Pelling

Most Popular Articles

startupsgovernment e1744799195663 Governments Are Not StartupsMariana Mazzucato
u421986cbef 2549 4e0c b6c4 b5bb01362b52 0 American SuicideJoschka Fischer
u42198346769d6584 1580 41fe 8c7d 3b9398aa5ec5 1 Why Trump Keeps Winning: The Truth No One AdmitsBo Rothstein
u421983467 a350a084 b098 4970 9834 739dc11b73a5 1 America Is About to Become the Next BrexitJ Bradford DeLong
u4219834676ba1b3a2 b4e1 4c79 960b 6770c60533fa 1 The End of the ‘West’ and Europe’s FutureGuillaume Duval
u421983462e c2ec 4dd2 90a4 b9cfb6856465 1 The Transatlantic Alliance Is Dying—What Comes Next for Europe?Frank Hoffer
u421983467 2a24 4c75 9482 03c99ea44770 3 Trump’s Trade War Tears North America Apart – Could Canada and Mexico Turn to Europe?Malcolm Fairbrother
u4219834676e2a479 85e9 435a bf3f 59c90bfe6225 3 Why Good Business Leaders Tune Out the Trump Noise and Stay FocusedStefan Stern
u42198346 4ba7 b898 27a9d72779f7 1 Confronting the Pandemic’s Toxic Political LegacyJan-Werner Müller
u4219834676574c9 df78 4d38 939b 929d7aea0c20 2 The End of Progess? The Dire Consequences of Trump’s ReturnJoseph Stiglitz

ETUI advertisement

HESA Magazine Cover

What kind of impact is artificial intelligence (AI) having, or likely to have, on the way we work and the conditions we work under? Discover the latest issue of HesaMag, the ETUI’s health and safety magazine, which considers this question from many angles.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
How are minimum wage levels changing in Europe?

In a new Eurofound Talks podcast episode, host Mary McCaughey speaks with Eurofound expert Carlos Vacas Soriano about recent changes to minimum wages in Europe and their implications.

Listeners can delve into the intricacies of Europe's minimum wage dynamics and the driving factors behind these shifts. The conversation also highlights the broader effects of minimum wage changes on income inequality and gender equality.

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Spring issue of The Progressive Post is out!


Since President Trump’s inauguration, the US – hitherto the cornerstone of Western security – is destabilising the world order it helped to build. The US security umbrella is apparently closing on Europe, Ukraine finds itself less and less protected, and the traditional defender of free trade is now shutting the door to foreign goods, sending stock markets on a rollercoaster. How will the European Union respond to this dramatic landscape change? .


Among this issue’s highlights, we discuss European defence strategies, assess how the US president's recent announcements will impact international trade and explore the risks  and opportunities that algorithms pose for workers.


READ THE MAGAZINE

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

KU Leuven advertisement

The Politics of Unpaid Work

This new book published by Oxford University Press presents the findings of the multiannual ERC research project “Researching Precariousness Across the Paid/Unpaid Work Continuum”,
led by Valeria Pulignano (KU Leuven), which are very important for the prospects of a more equal Europe.

Unpaid labour is no longer limited to the home or volunteer work. It infiltrates paid jobs, eroding rights and deepening inequality. From freelancers’ extra hours to care workers’ unpaid duties, it sustains precarity and fuels inequity. This book exposes the hidden forces behind unpaid labour and calls for systemic change to confront this pressing issue.

DOWNLOAD HERE FOR FREE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641