(Bloomberg) -- The European Union is at risk of widespread backlash against its climate agenda unless politicians do more to blunt the effects of rising carbon prices on low-income households, according to the head of Germany’s Environment Agency.

In some countries, farmers have taken to the streets to protest against climate policies that they say will threaten their existence. Polls also show that right-wing parties opposed to climate action are gaining traction among voters already dealing with soaring costs of living.

“The climate policy discussion will collapse under the pressure of these kind of social dynamics” unless officials take action, agency President Dirk Messner said in an interview. 

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Carbon prices — added to energy and industrial goods — will be the EU’s key tool for phasing out fossil fuels. Consumer groups are concerned about the trickle-down effect when heating and road transport fees are folded into the bloc’s new Emissions Trading System in 2027.

Germany’s Environment Agency, known as the UBA, has proposed using the proceeds from the pricing system to pay a so-called climate dividend to vulnerable consumers to ease the impact of the transition.

Time Pressure

Germany’s three-party coalition under Chancellor Olaf Scholz had promised to introduce such a climate dividend, but the proposal has been met with skepticism amid the country’s budget crisis. Finance minister Christian Lindner earlier this year dismissed introducing the measure during this legislative term, and a spokesman for Scholz added that it could be delayed until 2027.

“This is not good because we are under time pressure,” Messner said. If the new pricing system starts without having consumer protections in place, there will likely be public backlash, as there was when the country introduced a controversial fossil-fuel boiler ban, which it had to water down again last year.

Although companies pay carbon fees to pollute, the costs are ultimately borne by consumers. Germany, Europe’s largest economy, has already started pricing heating and road transport fuels at €45 ($49) per ton. That’s set to increase to €55 next year. The proceeds feed into the nation’s climate and transformation fund, which is already drastically overburdened to help finance heat pumps, electro-mobility or hydrogen measures.

Budget Politics

The country could unlock billions in funding if it shifted fossil-fuel or car-related subsidies for industry into decarbonization activities, according to Messner. He also criticized the government’s fiscal policy, which has enshrined a debt brake into the constitution. 

“Among the G-7 group, we are the country with the least pronounced and least relevant public debt,” he said. “Many foreign colleagues who I’m working with do not understand why we are producing politically a fiscal crisis.”

In November, the country’s constitutional court ruled that a transfer of unused Covid funds into the climate fund violates the law, causing the government to declare a budget emergency in 2023 and severe spending cuts in this year’s finance plan. 

“Our public debt structure is manageable and we have room to grow public investments,” Messner said. “If we don’t do so, we will damage our public infrastructure.”

--With assistance from Kamil Kowalcze and Michael Nienaber.

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