Rapid Decarbonisation of Heat and Transport Sectors Could Lead to Positive Economic Impact for Europe

A report by Cambridge Econometrics shows that rapid decarbonisation in heat and transport sectors could lead to positive macroeconomic impact for Europe, but it must be designed carefully to avoid putting a disproportionate burden on low-income households.

Commissioned by the European Climate Foundation and Transport & Environment, this report arrives in time for the European Commission debate in July 2021 to apply the EU Emissions Trading System (ETS) to cover additional sectors.

The report evaluated the impacts of relying solely on the establishment of a parallel ETS to deliver the needed emissions reductions, with different options for re-using revenues generated by the sale of allowances, against a regulations-focussed mix of policies.

There is a clear need for strong complementary policies to address both the environmental and distributional issues in order to reach the increased climate targets of -55%, as voted in December 2020.

Dóra Fazekas

Managing Director, Cambridge Econometrics Hungary

This report follows an earlier report by Cambridge Econometrics published July 2020, exploring whether or not the ETS was in fact the right tool for decarbonising European transport and heating fuels. The findings from this study concluded that the inclusion of road transport and buildings heating within the existing ETS would not achieve the desired policy goal and would simultaneously create additional challenges both to consumers and to current ETS sectors.

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Key Findings

There are potential macroeconomic benefits to Europe from more rapid decarbonisation of these sectors, although the precise magnitude of the benefits depends upon which policies are implemented to realise the goal.

Keeping road transport and buildings as part of national climate targets could deliver the most substantial economic impacts, while encouraging the take-up of low-carbon technologies.

By contrast, there are risks of negative distributional impacts from the introduction of an ETS that would require explicit policy to mitigate them.