Why bringing transport and buildings under the EU carbon market is not a good idea
Extending the EU carbon market to cover buildings and transport would not reduce emissions but could undermine existing legislation and risk instability on the market.
Last week, the European Commission published its proposal for a higher EU 2030 climate target of at least 55% along with a plan for getting there in practice. As a part of the package, the EU executive considers bringing buildings and transport under the EU’s emissions trading scheme – or alternatively, create separate ETS for these sectors.
This may sound like a good idea, but it could have undesirable effects, while not reducing emissions.
Cleaner transport or an excuse for inaction?
If road transport was included in the EU carbon market, this would probably only translate to a price increase of a few cents per litre at the fuel pump. While perhaps painful to some, it is very unlikely that this alone would make people drive less. The sector would basically end up covering its emissions by buying pollution permits, instead of bringing emissions down.
In fact, there are more effective tools to clean up road transport, such as CO2 standards for new vehicles, which the Commission also promises to tighten in last week’s communication. An EU level carbon price could be used as an argument for the car industry to weaken other regulation.
Pollution price will not improve our housing stock, energy efficiency standards will
When it comes to buildings, the heat demand in the housing sector, for example, varies according to weather conditions which would impact the demand for emission allowances. The volatile nature of emissions in this sector would thus risk destabilising the scheme that has just recovered from the hit it took at the beginning of the pandemic.
Furthermore, as is the case for transport, a price increase in heating fuel is unlikely to decrease demand. In the residential sector, a carbon price would also not shake other barriers to the introduction of large-scale energy-saving measures. For example, individual apartment owners might not have an incentive to invest in energy efficiency technologies of the whole building. On the other hand, low-income families would likely be hit the hardest, as they have fewer possibilities to invest in new technologies or cut their spending in heating without reducing their quality of life.
In this sector, it would be better to focus on strengthening the energy efficiency standards and promoting deep renovations of buildings. These measures would bring clean, sustainable jobs that we desperately need in the pandemic recovery efforts. They would also bring concrete benefits for citizens in the form of more comfortable homes and smaller energy bills.
Messing with the cap
Bringing in new sectors would inevitably also start the discussions to increase the number of available pollution permits under the carbon market. Considering the massive oversupply on the market, this would be a dangerous path. Too many extra allowances would be a risk for the stability of the system.
The EU carbon price has been successful in driving out coal from Europe’s power sector. This progress should not be jeopardised by extending the scheme to sectors where it will do little more than serving as an excuse for not taking climate action.
In the upcoming review of the scheme, we need to instead focus on significantly improving the scheme so that it finally matches the need to respond to the climate emergency. This means fastening the pace at which emissions are reduced annually, strengthening the market stability system that absorbs surplus permits off the market, and phasing out free pollution permits.
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