Social Climate Fund Inches EU Closer to a Just Transition

Calls for a definition of ‘vulnerable communities’, the exclusion of fossil fuels, and a clear plan of action to make sure funding goes where it is most needed.  

The Social Climate Fund (SCF) will play a key role in supporting a just transition in Europe, but EU lawmakers have been urged to prioritise support for the most vulnerable when addressing unanswered questions about how the fund will work in practice. 

“The success of net zero or climate change-related policies depends on the integration of social considerations to ensure a just transition, and the SCF clearly highlights that the EU is mindful of the social ramifications of an extended Emissions Trading System (ETS),” said Brendan Curran, Policy Fellow for Sustainable Finance at the London School of Economics Grantham Research Institute on Climate Change and the Environment (LSE GRI).  

In December, the European Commission, Council and Parliament reached a general consensus on the three prongs of its carbon pricing strategy, including ETS 2, which will cover fuels for the road transport and buildings sectors and have a more direct impact on the general public.  

The SCF intends to shield vulnerable households, micro-enterprises and transport users from energy price spikes driven by ETS 2 through the mobilisation of €87 billion between 2026-32, predominantly financed by revenues generated by the ETS, with 25% of the funding supplied by member states. 

The fund will provide capital to member states who can then invest in measures that support the general public, such as improving the energy efficiency of buildings, upscaling domestic renewable energy sources, and improving access to zero to low-emission transport.  

“It’s a great first step, but it’s important that they now get the details right and the benefits are felt by the most vulnerable – fortunately, they have three years to do so,” Curran told ESG Investor. 

More questions than answers 

Crucially, the EU needs to be clear with its terminology for the SCF, said Curran. 

“What does the EU mean by ‘vulnerable’, for example? Will they be deciding that in terms of real wages?” he posited, warning that a qualitative assessment to determine exactly who needs the money most and where to draw the line could prove “fractious” and become a “very political issue”. 

Unclear terminology has been a criticism of other EU legislation, most notably the definition of “sustainable investment” under the Sustainable Finance Disclosure Regulation (SFDR) 

“There is also the difficulty of ensuring equity amongst member states,” Curran added. 

EU countries will be required to consult with local and regional authorities to develop and submit ‘social climate plans’ that will outline how they would use funding from the SCF, which will be limited to 37.5% of the total estimated cost of their national decarbonisation plans.  

“For Parliament, it was important that the fund would not be a blank cheque for member states,” said Co-Rapporteur Esther de Lange. 

However, it is so far unclear whether member states’ existing support measures will be considered and whether this will have an impact on funding decisions.  

The World Wide Fund for Nature (WWF) highlighted that the SCF currently doesn’t exclude fossil fuels from receiving investment from the SCF, meaning that funding could actually “perpetuate people’s exposure to fossil fuel (and carbon) prices for longer”, the organisation said. This includes low-emission vehicles, rather than strictly zero-emission ones. 

“The failure to exclude fossil fuels is yet another example of EU negotiators prioritising the needs of big, polluting industries while side-lining those of citizens,” the WWF added, calling for EU negotiators to exclude fossil fuels from the SCF and phase out free allowances for industry under ETS 2 as fast as possible.  

Despite debate over the fine print, LSE GRI’s Curran said the SCF is a welcome addition to the EU’s carbon pricing framework.  

“It would be fantastic to see this kind of fund replicated elsewhere, such as the UK, so that more jurisdictions have the support in place to ensure a just transition,” he said. 

The current SCF proposal will now be transmitted to the European Parliament and Council, as well as the Economic and Social Committee of the Regions for further consideration.

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