Cambridge Econometrics was commissioned by the European Climate Foundation to explore the impacts of an increase in ambition in decarbonising the road transport and buildings sector on the European economy and on household purchasing power.

The analysis was commissioned in light of the range of climate policies being revised under the 'Fit for 55 package', including the EU Emissions Trading Systems (ETS) and Effort Sharing Regulation (ESR).

A separate parallel ETS for road transport and building heating sectors was being considered by the European Commission,  imposing an additional price on emissions in these sectors without negatively impacting the operation of the existing ETS.

Approach

Using macroeconomic model E3ME, two different scenarios were developed to explore policy pathways to achieve the same level of emissions reductions in the non -ETS sectors (road transport and building heating) as ETS sectors (power):

1. Policy measures focussed on regulating fossil fuel-based  technologies and encouraging the take-up of low-carbon alternatives,  specifically targeting the transport and building heating sectors. In this  scenario these sectors would remain covered under the ESR.
2. Parallel EU-wide ETS: A single price for current non-ETS sectors from 2025 onwards (but with no explicit links or convergence to the existing ETS). For this scenario, we also analysed different revenue recycling options through a sensitivity analysis to evaluate the different economic impacts of recycling options.