European Climate Foundation: Assessment of the impacts of an ETS2 for transport and buildings

New scenario analysis by Cambridge Econometrics for the European Climate Foundation reveals the varying impact of introducing, or not introducing, ETS2 on emission reduction for the building heating and transport sectors.

The study considered the impact at Member State, regional, and EU27 levels and is part of an ongoing series of studies on the EU Commission’s ‘Fit for 55 by 2030’ package which Cambridge Econometrics is undertaking.

ETS2 is a trading system, proposed by the European Commission, that would operate in parallel to the main ETS and would cover the emissions associated with the use of fossil fuels in transport and building heating. The existing ETS focuses on energy intensive industries and the power sector.

Each scenario provided the opportunity to compare various options to meet the European Commission’s latest emissions reduction target – as set out in the Fit for 55 legislation (FF55) – either with or without the ETS2.

The study highlighted the need for careful policy design for ETS2 and the building heating and transport sectors. In particular, policymakers should evaluate the scale of marginal emission reduction achieved by the ETS2, and the trade-offs in terms of socioeconomic and distributional impacts associated with introducing this.

Key findings:

• With ETS2, emissions reductions achieved are greater in the buildings sector because existing buildings can be decarbonised, whilst emission reductions in transport require the replacement of older vehicles with new low- and zero-carbon alternatives, which is hampered by the slow turnover of the fleet.
• Emissions reductions achieved by the FF55 package fall short of meeting the target. Introducing more ambitious climate policies in these two sectors, or an ETS2, leads to greater reductions.
• ETS2 allowance revenues can be used to fund emissions reductions, such as low-carbon technology subsidies and public investment. In the absence of an ETS2, therefore, more public finance will be needed from other sources.
• Consumers have to pay higher prices for fuel and heating across all scenarios, but the impacts are smaller with more climate action/regulation and a smaller role for ETS2, compared to the climate action scenario.

Dóra Fazekas, Managing Director of Cambridge Econometrics Hungary, comments,

Targeting the required emissions reductions with more regulation (fuel efficiency standards and phase-out of ICE’s, and more building renovation) leads to smaller fuel price increases and slightly more positive overall GDP and employment impacts than achieving emissions reductions with an emissions trading system in the transport and building sectors.