04 March 2022

CER: How to make the new emissions trading system work for consumers

Extending the Emissions Trading System to buildings and road transport can cut emissions and help poor households if all revenues are devoted to income support and green investment.

In the EU, not all CO₂ emissions are considered equal: heavy industry and electricity producers face an EU-wide carbon price under the EU Emissions Trading system (EU ETS), but road transport and the heating of buildings do not. All EU member-states tax fuel, but levies vary. And some member-states have their own national carbon taxes. 

This is about to change. The EU’s ‘Fit for 55’ programme – a set of policies to cut carbon emissions by 55 per cent by 2030 relative to 1990 levels – includes a proposal to create a new system to cap and trade carbon emissions from two major laggard sectors, road transport and buildings, which account for about 25 per cent and 15 per cent of EU-wide greenhouse gas emissions respectively. (I have previously written about the proposed reform of the existing ETS here.)

Manufacturing and energy industries, currently covered by the EU ETS, have cut greenhouse gas emissions since 1990 by about 40 per cent, while decarbonisation in the commercial and residential building sector has not been as fast, with emissions reductions below 30 per cent. However, road transport has increased emissions by almost 30 per cent (see Chart 1). The new ETS aims to reverse that trend in transport and accelerate decarbonisation in buildings, cutting combined emissions from these sectors by 45 per cent by 2030 relative to 2005 levels.

How carbon pricing in road transport and buildings will work

Under the Commission’s proposals, in 2026 the EU’s new ETS (let us call it ‘ETS2’) would cap emissions from road transport and heating and gradually tighten the cap year by year. Intermediaries such as companies selling fuel for cars and heating (as opposed to final consumers such as households and businesses) would be required to show compliance with regulation by surrendering pollution permits.

In the existing ETS, heavy industry receives a number of emissions permits for free, on the grounds that its international competitiveness might be damaged by carbon leakage. Conversely, in ETS2 there will be no freebies: all permits would be auctioned. This is because there is no reason to think that households would leave the EU due to carbon pricing.

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