Feasibility and impacts of EU ETS scope extension: Road transport and buildings

The European Green Deal reinforced the European Union’s effort to reduce EU-wide emissions (compared to 1990 levels) and to achieve no net emissions of greenhouse gases by 2050. Such ambitions will require a revision and strengthening of existing EU and national climate policy instruments, which includes the EU Emissions Trading System (ETS).

As the European Commission considers extending the EU ETS scheme to the transport and building (heating) sectors, this CERRE Energy & Climate report assesses the potential impacts and feasibility of such a development.

The report raises an important red flag: while such an extension would help Europe achieve its climate goals, it could also have distributional effects. For example, the most vulnerable consumers could face (proportionally) higher costs for road transport and heating fuels, which would need to be addressed.

“The ETS is Europe’s carrot-and-stick approach where carbon dioxide (CO2) emitters are given financial incentives to cut down emissions. Extending this system to new sectors will inevitably have consequences for businesses and citizens,” explains Geoffroy Dolphin, co-author of the report. “The EU should monitor these carefully and set mitigation measures where needed to ensure the most vulnerable are not those incurring the highest burden of climate change mitigation measures.”

The research identifies several policy options for mitigating distributional effects, including adjusting existing fuel taxes and the targeted use of revenue derived from additional emissions permit sales to support poorer consumers who might be adversely affected by the extension.

The extension of the EU ETS should be consistent with the EU’s 2050 net zero target and should have an overall carbon budget that is compatible with that of the Paris Agreement’s objective.

“Europe already has specific policies in place for the transport and buildings sectors”, highlights Professor Michael Pollitt, one of the report’s authors. “The extension of the EU ETS to road transport and heating fuels should be paired with existing policies that are complementary and have the advantage of targeting local externalities, promoting learning benefits, and overcoming buyer bias. This is not a black and white debate where policy makers must pick between an EU ETS extension and a tightening of current CO₂ standards regulation.”

Earlier this year, the European Commission published a proposal for the first European Climate Law, writing into law its goal of making Europe’s economy and society climate-neutral by 2050. This law sets the long-term direction for meeting the 2050 climate-neutrality objective through all policies and in a socially-fair and cost-efficient manner.