Until now, one of the tools in the fight against climate change has been providing aid to companies to help them change their production structures and pollute less. However, the Directive (EU) 2018/410 on cost-effective emission reductions now states that when Member States do not use 25% of the revenues generated from the auctioning of emission allowances for compensating indirect costs, it actually improves the goals of the EU Emissions Trading System (EU ETS), while also preserving the integrity of the internal market.
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What does the Directive mean, and why does limiting auction revenues used to offset indirect costs help improve the goals of the EU’s regulated and mandatory carbon market?
Let’s try to explain it with an example: Imagine we have a jar full of coins that we’re going to use to fight climate change. These coins represent the revenues from emission allowance auctions—in other words, the money earned from selling permits to pollute. The Directive says we can use up to 25% of these coins to compensate certain industries that are negatively affected by emission reduction measures. This is like giving a small prize to these industries so they don’t get too upset.
What are these indirect costs?
Indirect costs are like “subsidies” that some countries give to their companies to compensate for the extra expenses they face due to pollution reduction measures.
Why limit these compensations?
We could say that the European Union, in its fight against climate change, is evolving and actively correcting inefficiencies as they arise. There are at least four reasons that help explain this shift:
More funds to reduce emissions:
If countries spend less on compensations, they will have more money to invest in clean technologies, renewable energy, and other actions that directly reduce emissions.
Deterrence: Preventing “cheap pollution”:
If compensations are too generous, companies might choose to pay them rather than invest in cleaner technologies, which would slow down the transition to a low-carbon economy.
Protecting the internal market:
If each country applies different rules for compensations, it distorts competition and undermines the functioning of the European single market.
Greater incentive to go green:
If companies know they won’t receive as many subsidies, they’ll be more motivated to find cleaner, more efficient ways to produce.
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