In the lively debate around carbon pricing and emission reductions, one crucial aspect is consistently missing. Much of the debate focuses on the carbon price alone. However, carbon revenues are at least as important as carbon prices if Europe’s goal is to accelerate emission reductions to meet our Paris commitments—and do so at a pace that is both affordable and politically sustainable over the coming decades. Evidence is strong that investing, or “recycling,” carbon revenue in low-cost carbon reductions through programmatic energy efficiency is one of the key strategies to achieve these critical objectives. 

The revenues generated by auctioning carbon allowances under the European Union’s emissions trading system are likely to increase in the future. This growth is driven by recent changes within the trading system framework, especially the implementation of the market stability reserve starting in 2019, which addresses the historic imbalance between supply and demand in the EU carbon market. Given the increase in carbon revenues, it becomes ever more important to assess their use and potential contribution to speeding up decarbonisation efforts. 

Strategically investing carbon revenues in end-use energy efficiency can yield multiple dividends: 

1. Additional emission reductions from sectors both covered by, and outside of, the emissions trading system; 
2. Lower economic and societal decarbonisation costs, capturing a larger fraction of cost-effective emission reduction potential and reducing energy bills for end users;  
3. Energy efficiency (and the resulting demand reduction) also delivers a wide range of so-called “non-energy” benefits to consumers and society. Amongst those are improvements in health, comfort, air quality, public housing and welfare costs, job creation, and economic growth; 
4. Support for the political process to further tighten the cap in the emissions trading system. An increase in the political will and social acceptance, as a result of the previous benefits, can enable more ambitious long-term decarbonisation targets. 

Our assessment of the status of carbon revenue use at EU Member State level shows that the potential to use these multiple dividends is largely untapped. Some Member States recycle auctioning revenues for energy- and climate-related programmes. However, the fundamental understanding that both the carbon price and the strategic use of revenues can help to achieve the EU’s decarbonisation targets cost-effectively is limited.

The analysis of the Member States’ use of carbon revenues shows that in 2016, 61 percent of total revenues are strategically invested for energy and climate purposes and no more than 26 percent in energy efficiency programmes. Building efficiency programmes in the Czech Republic, Germany, and Latvia illustrate the potential to realise multiple dividends through carbon-funded energy demand reductions. Bringing carbon revenue recycling into the carbon price debate is key to unlocking the unused potential of end-use energy efficiency.