The European Union is implementing a new carbon market targeting emissions from road transport and building heating. This "ETS2" initiative will cap emissions at just over a billion tonnes annually starting in 2027, requiring fossil fuel suppliers to purchase allowances through auctions. The cap will reduce emissions by 42% by 2030 compared to 2005 levels, aligning with EU climate targets.
The ETS2 is expected to:
- Encourage a shift to renewable energy by increasing the relative cost of fossil fuels.
- Drive investment in energy efficiency and electric mobility.
- Contribute to the EU’s goal of cutting overall emissions by 90% by 2040.
The price of allowances, estimated at €45 per tonne of CO2, could add about 10 cents to a litre of petrol. However, higher prices are likely if home energy improvements and vehicle electrification lag behind the reduction in emissions allowances.
Public backlash is a key concern. In response, the EU has established an €86.7 billion Social Climate Fund (SCF) to help vulnerable households cope with rising costs. The SCF will direct auction revenues toward energy-poor households and those facing high transport costs. Additional revenues, potentially exceeding €200 billion, could support broader social climate policies.
Despite the potential benefits, there are hurdles:
- The revised ETS Directive has not been adopted by most member states, signaling a lack of political will.
- Governments may face resistance from the public, echoing movements like France’s 2018 "yellow vests" protests against green fuel levies.
With the ETS2 set to roll out in 2027, the European Commission is urging member states to enact complementary measures and prepare social support frameworks. If implemented effectively, the scheme could play a critical role in achieving the EU's long-term climate objectives, ensuring a just transition while tackling emissions in traditionally challenging sectors.
