The European Commission has announced the initiation of a new emissions trading scheme, known as ETS2, which sets a cap for greenhouse gas emissions from fossil fuels in road transport and building heating at just over a billion tonnes annually, starting in 2027. This measure aims to establish a competitive carbon market for emissions allowances, driving up fuel prices unless governments promptly implement demand-reduction strategies. Drawing parallels with the EU’s longstanding emissions trading system (ETS), the objective of ETS2 is to curtail emissions in sectors that have historically shown little improvement, specifically addressing road transport and the heating of buildings, which together contribute significantly to overall EU emissions.
The significance of this initiative is underscored by the EU’s climate goals for 2030, which aim for a 42% reduction in emissions from 2005 levels. The first-year cap set by the Commission is expected to decrease annually to comply with these targets. Eleanor Scott from Carbon Market Watch highlights that this system is critical for achieving the EU’s long-term climate ambition for 2040, which includes a reduction of emissions by at least 90% compared to 1990 levels. The ETS2 is projected not just to encourage a gradual shift from fossil fuels to renewable energies but also to generate substantial revenue for social climate policies, thus fostering further investments in renewable energy infrastructure.
However, the implications of ETS2 on fuel prices are complex. Early estimations suggest that a carbon price of approximately €45 per tonne could lead to an increase of about 10 euro cents per litre of petrol. Nonetheless, should the transformation toward home efficiency improvements and electric mobility fail to progress at the same rate as the cap on allowances declines, carbon prices could soar even higher. The potential for increased living costs has prompted lawmakers to establish a Social Climate Fund (SCF) to help mitigate the burden on vulnerable households reliant on affordable heating and transport solutions, thus addressing public concerns stemming from similar past initiatives.
Despite the ambition driving the ETS2, skepticism persists among member states regarding the readiness to enforce the scheme. There was notable urgency for governments to act when, in July, the European Commission had to pursue infringement proceedings against almost all EU states for failing to meet the deadline for enacting the revised ETS Directive. Such hurdles indicate a potential lack of political will and readiness to implement this significant climate policy. Lawmaker Peter Liese has expressed commitment to the ETS despite resistance to broader environmental policies, suggesting that there is a split in political sentiment regarding how aggressively to pursue climate goals.
Public acceptance will largely depend on how effectively countries leverage the anticipated revenue from ETS2 to implement supportive measures addressing energy poverty and transportation costs. The SCF is set to allocate approximately €86.7 billion towards these areas, serving as an essential tool for those facing financial challenges stemming from rising fuel prices. However, Scott believes that the spending of the remaining ETS2 revenues, expected to exceed €200 billion should permit a carbon price of €45, will be vital to ensure the system’s fairness and maintain public support.
The pathway forward necessitates a proactive approach from EU member states, which must now develop strong complementary measures alongside the new carbon market to decrease overall emissions and lessen the demand for allowances. Achieving a balance where the carbon pricing effectively incentivizes reductions in fossil fuel use while simultaneously safeguarding vulnerable communities will be critical. Failure to address these pressing social implications can threaten the viability of the ETS2 initiative as it seeks to facilitate a transition to greener energy solutions within the EU framework.
