What is happening with ‘Green Conditionality’ in the bailout plans against the corona crisis?

I’m fighting hard to have conditionality in the State Aids guideline that the Commission will present on Monday (the 11th/5), to have a public, transparent and detailed plan towards climate neutrality.

We will see on Monday, it will be a sort of stand out of the recovery fund. This is my first battle and then we will focus on the recovery plan.

Why does nobody want to go near the phasing out of Fossil Fuel Subsidies (FFS)?

The answer is that, as we say in French, ‘in each kennel there is a dog’ (dans chaque niche il y a un dog). It means that behind each tax break, you have a lobby. So it’s not subsidising the fossil fuel industry in itself. It is subsidising the lobby using the fossil fuel. So on Monday it’s the farmers, on Tuesday it’s the lorries, on Wednesday it’s another one.

So, when we say we subsidise the fossil industry, actually we have tax breaks to reduce the cost of energy for those categories that have been able to negotiate that with our authorities. So it’s not a subsidy to Total but to the farmers.

This shows why it’s so difficult for governments to reduce those subsidies, because they don’t negotiate with Total or Shell or BP, but if I take the French example, the negotiation is with farmers or haulage companies  and they have the capacity to immobilize the country. We had that with the “Bonnets rouges”, when the government precisely tried to withdraw the tax break for the lorries.

So, it’s important to have transparency on the subsidies, yes. But also, I believe we need to have green transition contracts with the sectors concerned (taxi drivers, farmers, haulage, etc.) where the profitability of the business model depends on the direct subsidies of the tax payer.

But should this battle of green transition contracts be done at a National level or at the European level, so as to avoid unfair internal market competition?

Absolutely! The European level.  To have a level playing field is the key. State aids, which is a subsidy in essence, if it’s not attached to green conditionality, it’s a problem. The Commission is expecting €2 trillion of state aids to be notified to the Commission. If there is no connection with the Green Deal, climate neutrality and so on, for real not just asking “to reduce your CO2 emissions”, then it’s just green-washing. So, what we need is something connected with climate neutrality. The mass of subsidies is in front of us, it will be a strong signal, if there won’t be any Green Deal conditionality then it will send a very strong, negative signal.

How can one solve the basic European problem with taxes: the need for unanimity, like what happened with the Energy Tax directive (ETD)? On the other hand, there are national governments claiming the loss of competitiveness if they act alone. How can this dilemma be solved?

The first answer would be to switch from unanimity to qualified majority. Second, I say this is sometimes just an excuse. Look at Sweden, they have a carbon price of more than €100 on carbon, they are still in the single market, they are still pro-trade agreements. So, you can act even at a national level, even with the unanimity, you can act on the front of green taxes!

In the short term we have the tool of the ETS market, because putting a price on carbon through the ETS is exactly the opposite of a subsidy. This is what we have to do to give a fair and just price to carbon to capture externalities.

And, second, it’s about a regulatory regime. Europe is very weak on tax issues but it’s very strong on standards. What the EU has been doing for decades is setting standards, on energy efficiency, on CO2 used by cars. The EU is very strong in setting standards because of the Treaties and because of the fact that the entry point is the single market. That’s why through standards you can get at least equivalent results from the climate perspective as putting taxes or, I believe, even better results.

One example is the renovation and the efficiency standards on new buildings. If you withdraw the standards and you say, I’m going to put a tax on it, the equivalent of the level of tax you should have instead of the standard is more than €1,000 per tonne of CO2. This means that when it comes to house renovation, energy efficiency and isolation, standards are much more efficient than taxes. So, we should not focus only on the taxes for fossil fuels, we should also focus on standards.

How can the free permits of ETS be justified?

I think we should sharply reduce those free allowances and in parallel, introduce a carbon border adjustment mechanism to be sure we transform our carbon intensive industries (steel, cement and chemistry) by protecting them with a border carbon tax.

But then chemical industry says ‘we will lose in the global market’ if they don’t get the free allowances anymore. So, we will have to relocate our production outside the single market. What do you tell them?

The logic of the Green Deal is that when we will have to find a way to produce without producing CO2, you will advance and then you will better export. This is what I heard from the industry. We need, as usual, transition contracts with the losers, to phase out for the free allowances, giving the industry some time to go out from free allowance.

We hear more and more from economists, but also climate activists, that this carbon border mechanism won’t ever work, because of the administrative burden. This includes a lack of control over a third country produces a product. From a legal point of view, this could also discriminate against the third country in front of the WTO. How do you answer to these critics?

If I take steel, we know perfectly well where our steel comes from, because there is already a liability folder. When you buy steel from China, there is good and poor quality, we know all that. So, it will be very easy to plug the carbon accounting based on this information. So, we should start with heavy industries, where it’s easy to trace.

Then, we will move to phase two where it’s technically more complicated, like in high level manufacturing. But just because it’s complicated doesn’t mean that we don’t do something.

The carbon border mechanism is made for ONE PURPOSE: to AVOID carbon leakage. Many studies demonstrate that there are only a couple of industries where there is a real risk of carbon leakage, and these are heavy industries. So the purpose is to protect 5-6-7 key sectors heavily dependent on carbon, where there is a risk of relocation. So, if we are able to design something for these sectors, then we cover almost 90%. So, we don’t need to cover the whole ETS sector.

Second on the WTO objection: If the mechanism is adjusted on the ETS — if it’s the mirror of the ETS — then the price will be exactly the same and WTO-comptatible. Of course, we will have to take in to account the free allocations, so it’s not only a question of price, but also of volume of CO2 tonnes. It we apply these two criteria — the price and the volume — then you apply the same metrics to import.

How do you explain that precisely the heavy industries for whom this border mechanism would be put in place are the ones strongly opposing it?

We don’t have the same information on that.

Well it’s written on the open consultation that the Commission started with the main stakeholders. You can read their comments, they are all opposed.

The steel industry, the chemical industry they want this mechanism.

Well, yes they are in favour of a carbon border adjustment mechanism, but then they want to stick on the free allocations of ETS.

Ah, yes, but they won’t get both. They know that, so, it’s more on how to do that, than whether to do that.

What is the calendar of priorities for the next months?

There are two potential battles: the first would be to have a qualified majority and moving towards a tax regime on the EU level. My pragmatic reading of the situation is that it is way more efficient to increase standards on renewables and CO2 emissions, because the EU is very well-equipped and there would be. a qualified majority, instead of fighting first to move from unanimity and qualified majority. And also because in terms of results, the tax tool is not the most efficient one.

Look what happened with the gilets jaunes. If you put a tax on carbon for the car drivers, who pays for that? It’s the final car drivers. If you instead set a standard on the car industry to have more efficient engines, who will pay the cost of the investment ? The industry. And the approach is much more transparent and fair.

But all national governments are legally obliged to ban their fossil fuel subsidies.

Of course I’m not against that. It’s just that looking at the tool box, I would act in this other way.

The Green Deal has been hailed as Europe’s “man on the moon” moment. Can you give us a political statement on this?

They are building the platform, but the man is not yet on the moon.