Fit and fair: The case for a European fund for targeted renovation

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The introduction of carbon pricing in the building sector will increase the need for social climate spending, argue Louise Sunderland and Samuel Thomas.

Louise Sunderland and Samuel Thomas are both senior advisors at the Regulatory Assistance Project (RAP). 

This week European Commission Vice President Frans Timmermans revealed that any extension of carbon pricing to heating and transport would be accompanied by a “climate action social fund.” He states the purpose of this fund is to compensate for possible adverse effects, especially for the most vulnerable citizens.

Our new report Pricing is just the Icing assesses these impacts and carbon pricing’s role in the buildings sector. We propose ambitious regulatory reform and a socially focussed renovation fund — not unlike what Timmermans has proposed this week — supported by a gradual and measured introduction of carbon pricing, either at an EU or member state level.

Social climate spending is needed regardless of carbon pricing

Timmermans explains the necessity for this fund as a consequence of the introduction of carbon pricing, but it is needed and justified even if the Commission does not proceed with the pricing proposals. Europe has already set itself social objectives for the energy transition to be “just and inclusive” and for the Renovation Wave to alleviate energy poverty this decade.

Achieving these obligations will require significant new socially focussed climate measures. The introduction of carbon pricing would increase the need for such assistance and should accelerate the rate at which funding is dispersed.

The impact of the Fit for 55 Package will be felt by Europeans like no previous set of climate measures. The European Commission expects emissions from the residential buildings sector to fall by more than 60% by 2030 from 2015 levels as the Renovation Wave builds over the course of the decade.

To ensure that this transition delivers on the EU’s social goals and turns the tide on rising inequalities, there are opportunities across the entire Fit for 55 package to ensure that the benefits of the transition are available to low-income and vulnerable citizens.

Carbon pricing plays only a small role in buildings’ sector decarbonisation

In our report, we assess the role of carbon pricing in buildings decarbonisation. We examine the options open to the Commission, including extending the Emissions Trading System (ETS) or implementing a parallel ETS for the buildings sector. We conclude that neither of these options would be best for the sector.

We analyse how higher energy prices have a regressive impact in many different ways, including geographical impacts, income-based impacts and impacts based on a range of other factors, including efficiency of buildings, access to clean fuel alternatives and other horizontal inequalities.

To shield low-income and otherwise heavily burdened households from the impact of the carbon price on bills, some direct payments to support incomes or reduce energy bills will be required in the short term.

Efforts should be concentrated, however, on low-carbon investment. This permanently reduces heating bills, brings the full benefits of energy efficiency and decarbonisation, and reduces the need for ongoing income or energy bill support. These objectives require up-front investment, which should be a major priority for the new European fund.

Structuring a social renovation fund

This fund should contribute significant additional, dedicated funding for renovations targeted for specific household groups. Many European funds can be used for renovation but not many must be used for renovation.

Buildings therefore have to compete with other decarbonisation or recovery projects, which are often more centralised and rely on fewer dispersed stakeholders. Renovation finds it hard to compete.

The fund should frontload spending as one of the key policy measures to alleviate energy poverty this decade. Funding should ensure as many households as possible are helped to decarbonise in advance of any carbon pricing or mandatory renovations required by minimum energy performance standards.

The fund’s design should meet the following priorities:

  • Adequate to the scale of the need. All possible sources of funding should also be pursued to adequately resource the fund, including revenues from the existing EU ETS. If pricing is extended to the buildings and transport sectors, the equivalent of 100% of the new revenues at a minimum should be ringfenced, not as Timmerman’s proposes, “part of the revenues generated.”
  • Target all households in need, not just those in poorer geographical areas. Funding should be available to those already struggling with their energy bills and who will be additionally burdened by the carbon price. This includes households already in energy poverty, those on low-income who will be disproportionately burdened but have no investment ability to decarbonise, and those living in the worst-performing homes, using high-carbon fuels who will also experience high burdens. These households live in almost every community in Europe. Existing approaches to targeting European funds commonly use geographical eligibility — the Modernisation Fund is available to the 10 lowest income Member States and the Just Transition Fund is available to coal and carbon-intensive regions. Following this approach would not make funds available to all households who need them.
  • Reach delivery bodies at the right geographical/administrative level. Funding should be available where it can be used most effectively. For energy poverty alleviation, support is often best delivered at the local level, through local authorities, integrated renovation services and one-stop shops. Funding could be combined with technical assistance to cities, regions or communities.
  • Aim for swift dispersal. Funding should be dispersed to those that can use it quickly. Given the urgency of the climate and social goals this decade, there is no time to waste. The fund should be structured to ensure that money is released as quickly as possible and frontloaded to increase impact this decade. Assessment procedures and granting should be as streamlined as possible. To enable local delivery organisations and supply chains to scale up, and aggregators to build business models, funding should be available in short lead times.
  • Secure social impact. Funding should be governed by proportionate but adequate oversight and verification of impact. Given the scale of the funds that should be available and the granular level at which they will be spent, defining eligibility criteria, application and dispersal processes, reporting and verification all needs careful attention. They should ensure robustness and value for money and that the bureaucracy does not create barriers to the target recipients.

The commitment from the Commission to create a social fund is very welcome. Its design will be crucial. If it is dedicated to building renovation and is sufficiently large, targeted and quickly dispersed, the fund can significantly contribute to both its climate and social objectives.