21 October 2021
The European Commission proposes to introduce a new emission trading system for buildings and road transport as of 2026. Is this a good thing or a bad thing? Will this system have the desired effect? The Flemish Energy and Climate Agency asked Climact and the Öko Institute to assess the expected impacts on 1) emission reductions, 2, the carbon price 3) energy bills, 4) auctioning revenues and 5) administrative burdens.
It’s important to read the whole study, as it is a very technical and complex subject, but here are our 4 main conclusions.
Main conclusion 1: emission trading is not enough to the required emission reductions by 2030, but can be used to support other policies
On its own, emission trading is expected to generate limited emission reductions by 2030. There are 2 main explanations for this. Firstly, both sectors are characterized by non-market barriers, which prevent cost-effective reductions to be triggered by a carbon price alone. Secondly, carbon pricing needs time to reduce emissions as it mainly steers investment decisions and investment cycles in both sectors are > 10 years. As the system would only start in 2026, the impact by 2030 is expected to be limited. The impact would however significantly increase beyond 2030.
Therefore, other policy instruments have to play a central role in reaching the 2030 climate objectives. Nevertheless, emission trading still plays a useful role to support such other policies, by aligning market signals and generating auctioning revenues. In particular, it addresses the current price gap between electricity and heating fuels which hampers the electrification of building heating, in particular if auctioning revenues are used to lower electricity prices. This would also reduce the need of other policies (such as subsidies) which also impose a cost on society.
Main conclusion 2: if emission trading is combined with other climate policies, we expect carbon prices under the system to range between €70 and €100 by 2030
Based on supply-demand projections, we expect that the carbon price under the new proposed ETS would reach €70 to €100/t by 2030. This is based on a moderate increase in other climate policies compared to today, and in line with the Commission’s own MIX-CP scenario (which would result in €80/t by 2030).
Main conclusion 3: at constant energy consumption levels, such price levels could have a significant impact on household energy bills. Increased energy efficiency, a decarbonisation of the energy mix and recycling of auctioning revenues will be important levers to mitigate adverse social impacts.
At current consumption levels – and thus before taking into account efficiency improvements or fuel switches – average household energy expenditures for transport and heating fuels would increase between €322 and €460 per year by 2030.The expected increase is on average lower in absolute terms but higher in relative terms for low-income households, and vice versa for higher income households.
Main conclusion 4: auctioning revenues for the Flemish region would range between €5 and €8 billion for the period 2026-2030. These revenues should play an important role in mitigating adverse social and economical impacts.
About two-thirds of the revenues would come from households. Consequently, the Flemish Region would have a yearly budget of €214 to €346 per household to support them in the transition. This would allow to support each household at the level of the expected impact on lowest-income households (which is between €226 to €323 per year). A more focussed approach on vulnerable households could even result in a net-gain for lowest incomes.