Do you heat your home with gas? Heating will become more expensive. Do you heat with wood? It will still get more expensive. Fuels will cost even more

The role of the financing instrument is to mitigate negative effects on households generated by the introduction of the carbon tax mechanism ETS 2. This new mechanism to tax fossil fuels used for heating homes and in road transport will be applied in the EU from 2027, but the reporting of emissions will start from January 1, 2025, and their monitoring is done from this year. The ETS 2 system will not cover households that use wood (80% of rural areas) for heating or households connected to centralized systems, which are mostly covered by the ETS I carbon tax mechanism, which obliges companies to hold emission certificates for each ton of CO2 they emit.

The funds will have to be used for investments that support vulnerable groups, citizens in energy or transport poverty, says the Center for the Study of Democracy (CSD), the initiator of the Romanian Energy Poverty Observatory (ORSE), in a report on the effects of the application of ETS 2 on countries in the region. The report “Identification of vulnerability to ETS 2 in the Central and Eastern European region based on the example of Romania and Poland. Recommendations for social climate plans’ was carried out by CSD together with non-governmental organizations in Poland (WiseEuropa) and Germany (Adelphi, Berlin).

The impact of ETS 2 on Romanian consumers

In Romania, 37% of households were in energy poverty in 2022, having spent more than 10% of their income on energy bills (electricity and heating), according to CSD modeling based on data contained in the Family Budget Survey carried out by the National Institute of Statistics. Therefore, any further increase in natural gas prices, such as that generated by ETS 2, would bring an additional cost that will be reflected in energy bills. Thus, at a cost of 70 euros/ton of CO2, the total expenses of a household will increase by up to 5%, according to the estimates included in the report published by CSD. For those on average incomes, the additional expenditure will be largely related to heating. Households in the top two income deciles (thresholds) are the least affected, as these households mainly use wood for heating, a fuel that is not included in ETS 2. However, these households will be indirectly affected, as any increase in the price of gas will lead to increased demand for alternative fuels and therefore to higher prices, including wood. This effect was recorded in Romania in the winter of 2021/2022, when timber prices rose and government attempts to mitigate the effects remained ineffective (the ceiling price of legal timber led to an increase in prices on the unregulated market), it shows the analysis cited. Middle-income households will mostly be directly affected by ETS 2, because they are the households that do not have much economic leverage and every change in prices directly affects their income. In addition, these households cannot afford large investments and need government support to switch to low-carbon heating options, upgrade buildings and other long-term measures. From the perspective of the inability to adequately heat the home, Romania is one of the most affected European states, with 15.2% of households in this situation in 2022, an increase compared to the previous year, according to Eurostat data. In Bulgaria, the percentage was 22.5%, and in Greece – 18.7%. In Hungary, only 4.7% of households could not adequately heat their home, a percentage almost similar to Poland (4.9%).

The Social Climate Fund will be operational from 2026, while the new ETS II for buildings and transport will enter into force the following year, in 2027.

The First stove program, in preparation

Official statistics show that in Romania almost half of the population lives in the countryside, and most of the houses in this area are old and energy inefficient. Here, heating is generally done on wood, in old stoves with very low efficiency. The government had no program to refurbish them, but is now preparing to launch a special program to provide subsidies to replace inefficient heating equipment. The money will be granted for devices with a minimum efficiency of 80% and low pollutant emissions. The financing will cover 70% of the costs of a stove, but no more than 10,000 lei per person. According to the draft Energy Strategy 2022-2030, there are 3.5 million homes in Romania that are heated with wood stoves, but many are old and have low efficiency. In Romania, there are 1.2 million homes connected to centralized heating systems, and of these, 600,000 are in Bucharest. Also, 2.5 million homes use natural gas, either in apartment centrals or in stoves, and the rest of the homes are heated with fuel oil, diesel, LPG or electricity.

Photovoltaics, limited effects

As for the subsidy programs for the installation of photovoltaic panels, they have been very successful, but the equipment has not reached the most vulnerable consumers because of the very high costs. They also have to contribute part of the money in addition to the subsidy provided by the state, and this is where the problem arises. These vulnerable consumers do not have the money needed for co-financing.

ETS II makes road transport more expensive

The new Road Transport Emissions Trading System (ETS II) will apply to road transport fuel suppliers from 2027, unless oil and gas prices are exceptionally high. Drivers will pay the new carbon tax which will be included in the price of petrol and diesel. Applying the system will make road transport more expensive, which will have chain effects, if we are talking about the commercial one.

High-income families hit harder

Regarding transport, the biggest impact, around 4% on total expenses, would be felt by Romanian households in the highest income deciles, according to the report published by CSD. This result is consistent with the fact that high-income households tend to use personal cars for daily commuting more than low- and middle-income households. However, special attention should be paid to the mobility of consumers in the top income deciles, where low impact may mask limited mobility and the need for better public transport infrastructure and services.

CEE states, more vulnerable

According to the report, the Member States of Central and Eastern Europe need special attention in the context of the application of ETS 2 and the Social Climate Fund. They have their own patterns of energy and transport vulnerabilities. Lower incomes than the EU average, a large stock of old and energy-inefficient buildings and reliance on polluting fuels for heating are all common features across the region. Moreover, in these countries, a large part of the population still lives in rural areas, in thermally inefficient houses, without the financial resources to insulate them and trapped in the use of inefficient heating fuels. All this leads to high levels of energy poverty.

What the fund will finance

The establishment of the Social Climate Fund is part of the legislative package “Prepare for 55”, which aims to achieve the objectives of the European Green Deal, which include reducing greenhouse gas emissions by 55% by 2030. The Social Climate Fund must finance concrete measures to combat energy and mobility poverty, both in the short and long term:

– Reducing energy taxes and duties or providing other forms of direct support to deal with rising road transport and heating fuel prices. This measure would be phased out by the end of 2032.

– Incentives for the renovation of buildings and for the transition to renewable energy sources in construction.

– Incentives for switching from private to public transport, shared cars or cycling.

– Support for the development of a second-hand market for electric vehicles.

“In Romania, households that use gas-based devices for home heating and are already energy poor will be the most vulnerable to ETS 2. But other types of households will also be indirectly impacted by the ETS 2 system. Therefore, a the big stake is to develop programs adapted to the energy needs of low- and middle-income households, which are vulnerable to any price increases. These households are already in precariousness or at high risk of energy poverty if they do not benefit from long-term interventions. One of the most important tasks for the authorities in the coming period is to identify and profile the households that will be most affected. This 6 billion euro financing from which Romania will benefit will create a major opportunity to reduce the high rate of energy poverty recorded at the national level, if the vulnerable categories of consumers are correctly identified”.

Andreea Vornicu, researcher at the Center for the Study of Democracy and co-author of the study