T
he energy transition requires a com-prehensive transformation of the cur-rent economy. Reaching the net-zero target will only be a partial success if not all citi-zens feel the positive effects. This will ultimately decide whether the transition is an EU success story or failure. Depending on how it proceeds, the process could boost the EU’s legitimacy by increasing social support or heighten public distrust of the European project.The fundamental challenge is that the costs and benefits of the EU’s ambitious ener-gy transition policy are unevenly distributed.
The policy not only needs to be redesigned; it also requires a change in mind-set.
The current situation may result from EU institutions adopting a perspective that is distant from citizens. Its key targets concern reducing greenhouse gas emissions from in-dustrial sites or the share of renewable energy sources in member states’ energy mix, while ne-glecting the changes’ social implications.
The poor are more affected by rising energy costs
The adverse effects of the energy tran-sition are unevenly distributed among EU citi-zens. The negative phenomena include:
→
an increase in energy prices’ share in the poorest households’ budgets,→
the concentration of energy poverty inregions with historically worse conditions for development, like Southern Europe and Central and Eastern Europe,
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unfavourable changes in which inequali-ty between regions, measured in terms of exposure to the risk of energy pover-ty, deepens.The adverse effects of the energy transition are unevenly distributed among EU citizens
Firstly, the data not only shows that house-holds’ energy costs are rising, but that the po-orest people are the most affected. According to the European Commission, the share of ener-gy costs in the poorest European households’
budgets rose from 6% to 9% in 2000-2014.
Over the same period, its share in average Eu-ropean households’ budgets increased, too, but by just 1 percentage point, from 5% to 6%
(see Chart 1). The disproportional negative im-pact on the poorest is particularly problema-tic because it leads to energy poverty, i.e. the state in which a household is unable to obtain the energy needed for heating, cooling, lighting and using equipment due to a combination of factors, which may include low income, high energy costs and the building’s low energy ef-ficiency (Sokołowski, Kiełczewska, Lewandow-ski, 2019).
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Part I. The challenge of growing economic inequality
↘ Chart 1. EU average – share of energy spending in household budgets
Source: European Commission (2016A).
Secondly, energy poverty varies geographi-cally. Studies point to three regions: Southern Eu-rope (around the Mediterranean) and Central and Eastern Europe, where energy poverty is more severe, and Northern and Western Europe, where the problem exists to a lesser degree and only af-fects people in the poorest social group. Germany,
where the average household spends 9% of its disposable income on energy utilities, is an exam-ple of a country in the third region. In Spain, in the Mediterranean region, the average household spends 11%, rising to 16% in Bulgaria and 18% in Hungary, countries in Central and Eastern Euro-pe (see Chart 2) (EuroEuro-pean Commission, 2016b).
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1
2 3 5 6 7
4 8 9 10
Poorest households Average households
10
Part I. The challenge of growing economic inequality↘ Chart 2. EU average – share of households’ disposable income spent on electricity, gas and other fuels used for heating, cooking or household appliances, by income quantiles
Source: European Commission (2016b).
0
0 12
4
12
4 10
2
10
2 16
8
16
8 14
6
14
6 18
18 20
20
2003
2003
2008
2008
2013
2013 lowest
20%
lowest 20%
lowest 20%
lowest 20%
20%top
20%top
20%top
20%top 4
4
4
4 3
3
3
3 Germany
Bulgaria
Spain
Hungary 2
2
2
2
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Part I. The challenge of growing economic inequality
↘ Illustration 1. People at risk of poverty or social exclusion (data for 2017; percentage of society)
Source: Eurostat (2017a).
There is an overlap between the data on geo-graphical variation in energy poverty and that on people at risk of poverty or social exclusion, which is one of the basic indicators of inclusive growth used by Eurostat to measure the effectiveness of
European cohesion policy. In both cases, countries in Northern and Western Europe have significantly fewer people at risk of poverty – including energy poverty – than those in the Mediterranean region and in Central and Eastern Europe (see Illustration 1).
Finally, changes in the level of poverty (inc-luding energy poverty) since 2008 point to deepe-ning inequality between the regions. In principle, between 2004 (the first year in which data for over ten member states was available) and 2007-2008,
the start of the financial crisis, the percentage of people at risk in individual member states decre-ased gradually. The financial crisis reversed this trend in some member states, especially in the Mediterranean region (see Illustration 2).
12.2 to 17.1 Legend
17.1 to 18.2 18.2 to 23.3 23.3 to 28.2 28.2 to 41.6 Data not available
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Part I. The challenge of growing economic inequality↘ Illustration 2. People at risk of poverty or social exclusion (change between 2008–2017, in thousands)
Source: Eurostat (2017b).
The wealthy benefit more from the current support system
The current support system, which aims to incentivise the energy transition, does not ena-ble all citizens to participate. A closer look at two energy transition measures from different sec-tors – subsidies for electric vehicles (EVs) and the EU Emissions Trading Scheme (EU ETS) – shows the essence of the problem.
The first example shows how policies may discriminate against low-income households, benefiting high-income ones. A common instru-ment supporting the move away from traditional vehicles is a subsidy (and/or tax break) for new EVs. This reduces the price for high-income ho-useholds, which typically buy new cars (Zach-mann, Fredriksson, Claeys, 2018, p. 79). However, low-income households gain little. For them, the benefits are not very tangible (e.g. cleaner air) or
postponed (secondary market for EVs). Measures designed in this way benefit the wealthy; the poor merely receive the vague promise of trickling--down gains.
The second example reveals a similar me-chanism, this time benefiting industry at the expense of governments and households (or ta-xpayers in general). The EU ETS has created three streams of distributing wealth to industry: firstly, by allocating free allowances that subsequently gained market value, secondly, by compensating for indirect costs at energy-intensive enterprises and, thirdly, by creating low-cost allowances from international projects that could be marketed in the EU with an additional margin (Zachmann, Fre-driksson, Claeys, 2018, p. 79). As a result, the EU ETS leads to rising energy prices that hit individu-al consumers, disproportionindividu-ally affecting the poor, while industry experiences the direct benefits.
-4.216 to -359 Legend
-359 to -135 -135 to 15 15 to 135 135 to 2.325 Data not available
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Part I. The challenge of growing economic inequality
Most of the current energy transition support mechanisms help to mitigate climate change and support the EU economy, but they also contribute to another serious problem - growing economic inequality
Both examples respond to climate chal-lenges relatively efficiently: subsidies for EVs shift preferences in the major car-buying group towards EVs and the EU ETS helps reduce green-house gas emissions. The point is: they mitigate climate change and support the EU economy, but they also contribute to another serious pro-blem, growing economic inequality (Zachmann, Fredriksson, Claeys, 2018, p. 7-10).
The broader trend of growing inequality
The EU energy sector and its uneven distri-bution of costs and benefits mirrors a wider trend. According to McKinsey Global Institute,
“Inequality within many advanced countries is moving in the opposite direction from the global trend of declining inequality between countries.
In G-7 economies and across many (but not all) advanced economies, wealth and income inequ-ality in general has been rising since the 1980s”
(Fine et al., 2019).
The EU energy sector and its uneven distribution of costs and benefits mirrors a wider trend
A similar conclusion can be drawn in rela-tion to EU regions. Since the EU enlargement of 2004, there has been a relatively high degree of convergence between trends in Northern, So-uthern, Western and Eastern Europe. Despite some differences in national trajectories, ho-wever, the average income of the top 10% has risen, while the income of the bottom 50% has either remained unchanged or fallen (see Chart 3) (Blanchet, Chancel, Gethin, 2019).
↘ Chart 3. Income inequality in European regions, 1980-2017: average income share for top 10% and bottom 50%
22.5 20
1980
Share of rational income (%)
1985 1990 1995 2000 2005 2010 2015
27.5 30 32.5
25 35
Northern Europe Western Europe Southern Europe
Top 10% average income share
Eastern Europe
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Part I. The challenge of growing economic inequalitySource: Blanchet, Chancel, Gethin (2019, p. 31).
22.5 20
Share of rational income (%)
1985 1990 1995 2000 2005 2010 2015
27.5 30 32.5
25 35
Northern Europe Western Europe Southern Europe
Bottom 50% average income share
Eastern Europe
This growing inequality is echoed by most low- and middle-income respondents across the G-7 countries, who believe that their wealth has either decreased or remained unchanged
over the past few years. In contrast, half of high-income respondents believe that they are wealthier now than a few years ago (see Chart 4).
Source: Fine et al. (2019, p. 45).
↘ Chart 4. Respondents indicating whether they had “more”, “less”, or “the same” amount of wealth in “the last few years”, % of respondents by income level
More wealth The same Less wealth
0 40 60 80
20 100
Middle income High income Low income
35 34 31
32 18 50
56 26 18
The data concerning the most economically vulnerable citizens is no less troubling. The relative poverty rate in G-7 countries has been increasing
since the 1980s. In 2016, it was 30%, 7 percentage points higher than 30 years earlier. It has been at this high level for several years already (see Chart 5).
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Part I. The challenge of growing economic inequality
↘ Chart 5. Relative poverty rate*, % of total population, G-7 average**, 1985-2016
20
1985 1995 2000 2005 2013 2010
Post-taxes and
Rising social discontent creates a legitimacy problem
The increase in living costs and unevenly distributed benefits due to the energy transition will contribute to growing inequality. This could have profound negative and widespread effects.
Firstly, inequality breeds mistrust towards other members of society and institutions. Inequality also discourages people from participating in public life (Brown, Ulsaner, 2002). Lack of trust and ci-vic engagement weakens the legitimacy of po-litical institutions.
Inequality breeds mistrust towards other members of society and institutions
Secondly, the observed economic inequ-ality raises questions about whether the strate-gic goals and ways of achieving them have been
correctly identified and followed. Policies that fail to acknowledge the social context of the energy transition will erode confidence in the validity of the EU’s climate and energy goals.
In autumn 2018, a wave of grassroots "yellow vests" protests swept through France. The re-gionally-differentiated demands meant that the movement was usually referred to as being aga-inst the French political elite. However, this de-scription misses the source of the discontent.
Citizens took to the streets to protest against an increase in the fuel tax, which President Emma-nuel Macron introduced to support the develop-ment of renewable energy sources at the expen-se of fossil fuels (expen-see Tagliapietra, Zachmann, 2018; Arak, Dudek, Szlagowski-Budacz, 2019).
People feared that it would reduce living standards.
Has this lesson been learned? Are people’s concerns in this age of growing inequality be-ing heard?
* The poverty rate is the percentage of people whose disposable income is lower than the poverty threshold, which is set as less than 50% of median household income.
** Average poverty rate for G-7 countries is based on 5-6 data points on average each year.
Source: Fine et al. (2019, p. 45).