Exploring the trade-offs in different paths to reduce transport and heating emissions in Europe

In this analysis, commissioned by the European Climate Foundation, we evaluated the socio-economic implications of potential routes to decarbonise transport and heating in Europe. We evaluated an Emissions Trading System (ETS), with different options for re-using revenues generated by the policy, against a regulations-focussed mix of policies.

The analysis shows that:

• There are potential macroeconomic benefits to Europe from more rapid decarbonisation of these sectors, although the precise nature of the benefits depends upon how the goal is realised
• 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.

An ETS would be expected to deliver substantial revenues, with allowance prices estimated to reach €180 per tonne of CO2 by 2030, and different revenue recycling options deliver different impacts on both the operation of the ETS and the wider economy; lump sum transfers can address regressive outcomes, but both transfers and tax cuts lead to higher levels of economic activity and therefore put upwards pressure on permit prices.

Conversely, using some of the revenues for public procurement of low carbon technologies can reduce the costs of these for consumers, delivering economic benefits while also reducing permit prices.