U-turn on EU’s Emissions Trading System for road transport and buildings carries huge environmental, social and economic price tag

A small number of politicians are pushing to reverse course on the Emissions Trading System for road transport and buildings (ETS2). However, such a u-turn would fuel the climate crisis and cost European society and the economy dearly. Member states have all the tools to roll out ETS2 fairly and effectively but they need to act now.

On Wednesday, Polish Prime Minister Donald Tusk called for a review of European Green Deal legislation, and took aim at ETS2, the new carbon pricing system for buildings and road transport set to begin in 2027. 

Tusks’s calls to reopen the ETS2 echoes the proposal of Czechia during a recent Environmental Council meeting of EU member states in December. Czechia, supported by only three of the EU27 (Slovakia, Bulgaria and Poland), called on the EU to weaken the ETS2 by delaying it to 2028 and making changes to the market stability reserve, which controls the amount of pollution permits in the market to suppress the ETS2 price.

Fortunately, fellow EPP member, Peter Liese, pushed back, saying that postponing ETS2 is not the solution. Liese is right. Any U-turns or changes of course will come with a heavy price tag. Not only will it exacerbate global heating, but it will also harm efforts to decarbonise European society, which will involve hefty social and economic costs in the future.

Depoliticise climate action

Instead of giving in to the politicisation of climate action, member states must implement agreed-upon legislation, using all the tools this offers to ensure that the ETS2 is fair to the most vulnerable in society and effective at tackling the climate crisis.  

Carbon Market Watch urges member states to stay the course and calls on the European Commission to ensure that they deliver on their commitment to transpose the ETS2 directive into their national laws.

What is ETS2

Starting in 2027, the EU will apply a price on the carbon emissions associated with buildings and road transport .  
The Emissions Trading System for road transport and buildings (ETS2, as it is also known), will mean around 75% of the EU’s emissions are now covered by carbon pricing. 

It is the second carbon market devised by the EU. The original Emissions Trading System (ETS) applies carbon pricing to heavy industry, energy generation, shipping and aviation. Despite its shortcomings, the ETS has, over the course of 18 years, helped bring down those emissions by 47%, mainly in the energy sector.

ETS2 operates in a similar way to its forerunner, capping pollution in line with the EU’s emission reduction target on an annual basis before decreasing this limit year by year. If implemented, as previously agreed by member states, these actions  will result in a 42% emission reduction by 2030 in buildings and road transport sectors compared to 1990 levels. 

This means the EU will stay on course to achieve its  overall target of a 55% net reduction in its planet-destabilising carbon emissions by 2050. 

Answering energy challenges and more

The dissenting member states must remember that ETS2 will deliver benefits beyond emissions reductions. 

As the cap tightens and burning fossil fuels becomes increasingly costly, the ETS2 will act as an essential incentive for national governments, companies and people to invest in decarbonising their buildings and vehicles, increasing the supply of  warm and comfortable homes while delivering significant energy savings. 

Concurrently, the scheme will play a role in bolstering the competitiveness of European industry, by boosting demand for renewable energy and fuelling innovation in decarbonisation technologies. It will also increase demand for retrofitting and energy efficiency in buildings, which will help stimulate the construction sector and create many skilled jobs in the expansion of energy and transport infrastructure.

Furthermore, reducing dependence on fossil fuels contributes to the EU’s geopolitical quest for energy sovereignty. EU imports of fossil fuels cost around €450 billion annually. The energy price crisis of 2022 resulting from the Russian invasion of Ukraine highlighted the dangers of overreliance on imported fossil fuels. 

Valid social concerns

During the revision of the EU ETS, there was concern over the social cost of imposing a carbon price on buildings and road transport. This led to the creation of the Social Climate Fund to provide over €86 billion (including member state co-financing) in support to those most at risk of increased energy and transport poverty as a result of ETS2 through direct investment and income support. 

A ‘soft price cap’ at €45 per tonne of CO2 and a measure to increase the amount of  emission allowances by 30% in the first year was also introduced to further protect against the risk of rapidly increasing prices, as well as additional conditions that allow for the release of more pollution permits when certain price thresholds are breached. 

Beyond the Social Climate Fund, the ETS2 will provide at least €260 billion in financing for climate spending for member states, based on the soft price cap mentioned above. In order for the ETS2 to be fair and effective, it is vital that these funds are spent on social climate policy, i.e. direct investment to provide affordable emissions reductions in buildings and road transport and income support for the most vulnerable. 

Boosting solidarity

ETS2 will most affect central and eastern European states, as these countries have a higher portion of coal users and their populations spend a larger proportion of their income on energy. Therefore, a solidarity mechanism was built into the SCF to ensure that these countries receive proportionately more funding than the rest of the EU. 

The proposal of Czechia highlights that further support mechanisms for this group of countries may be needed to ensure the ETS2 can be implemented in a way that protects vulnerable groups within these countries. 

However, backtracking on ETS2 is not the answer. Energy and transport poverty are already urgent issues across the EU, with over 40 million people unable to heat their homes in 2022, according to the European Commission. 

Poverty, combined with the hugely unequal energy consumption between higher and lower income groups, makes it clear that our energy system needs an overhaul. Scrapping the ETS2 would not end energy poverty but rather reduce the incentive and deprive us of the tools (such as the Social Climate Fund) to solve the root issue of fossil fuel dependency and provide lower income groups with affordable renewable energy, accessible climate-friendly travel and energy-efficient homes. 

Recognising that preparation for ETS2 is already well underway, any delay reduces certainty and means that the cost of meeting the EU’s climate targets becomes steeper as we struggle to stay within the allocated carbon budget.

In the name of the law

While the level of the ETS2 price cannot be known for certain until the market begins, it is clear that the best protection against the risk of high prices too early in the system is for member states to act now to introduce strong complementary policies to lower emissions, protect lower income groups and reduce demand for pollution allowances. This is particularly the case for the top five emitters (Poland, Germany, Italy, France and Spain), who make up 70% of emissions covered by ETS2. Successful complementary policies in these countries will have a big impact on reducing the ETS2 price, as well as the carbon footprint, across the union. 

Weakening the ETS2 as Czechia proposes by making changes to the market stability reserve (which adjusts the level of allowances in the system) to increase the number of emission allowances, risks artificially keeping the ETS2 price at too low a level to cause real change. The system should be allowed to launch with existing price control mechanisms until a better idea of the price emerges and the social implications can be understood. 

Wider impact on climate policy

Any reduction in the ambition of ETS2 will have a knock on impact on political pressure to implement the rest of the Fit for 55 package. Genuine concern over social implications must be addressed head on through collaboration with social organisations and people to design strong national social climate plans and for member states to dedicate all ETS2 revenue to social climate policy and to provide lower income groups with income support while they are assisted in decarbonising. 

Concern for the social implications of ETS2 should translate into effective climate action combined with rock solid social solidarity that leaves nobody behind

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