Where do the proceeds from carbon allowances go?

The rise in emission allowance prices keeps being mentioned in particular in relation to the high energy prices. In some cases, this is misleading, or more precisely the contribution of the rising prices of allowances to the overall higher energy prices is exaggerated. In our circumstances, the main driving force behind the increase is primarily up to a tenfold year-on-year increase of the natural gas price and up to a fivefold increase of the coal price on the world markets. There are multiple factors behind this unprecedented price spike, including the emerging recovery after the pandemic, speculation on energy producing materials for political purposes and, last but not least, technical issues related to the mining and storage of energy producing materials. The higher gas and coal prices consequently translate into a rise of electricity prices. The allowance prices contribute to this extreme electricity price spike only by 10 to 20%.

On the contrary, there is not much talk about the fact that the rising price has also considerably increased the state budget revenues by the proceeds from auctioning the allowances. In 2020, the state generated approx. 19 billion from the auctioning of allowances compared to the mere 5 billion in 2017. The proceeds which have been annually increasing in recent years, might soon exceed 30 billion a year.

The discussion on subsequent use of the proceeds of auctioning has intensified proportionally to the increase of those proceeds. The EU recommends that at least 50% of the revenues thereby generated should be invested in climate protection measures. At present, however, there is a real danger that most of the proceeds of auctioning will be absorbed by the notoriously deficit state budget without any contribution to the reduction of energy consumption or construction of renewable resources. The fact that the ‘New Green for Savings’ scheme, hitherto funded using the proceeds from allowances, is to be co-funded to the extent of CZK 5 billion by the National Recovery Plan, will also help increase the potential contribution of the allowances. The proceeds from allowances should be used for this scheme again only in 2026.

Given the dramatic influence of the across-the-board increase in prices of all energies on the budgets of businesses and households, proposals for the implementation of so-called climate dividend are often mentioned, the dividend to return a part of the proceeds from auctioning the emission allowances to households. Experiments with returning a part of the proceeds are under way for example in Austria where each adult will be annually entitled to EUR 100–200. The business sector most frequently discusses energy efficiency improvements and building of renewable resources to allow for covering a part of the consumption of businesses through their own production. And some believe that the proceeds from allowances could be used on a one-time basis to start a pension reform.

Time will tell where the proceeds from 193 million allowances for the period 2021–2030 will end up. Let’s hope that a significant part of them will be used to modernize the energy sector and reduce greenhouse gas emissions so that the EU ETS system fulfills its purpose.