The European Commission has announced a new emissions trading scheme (ETS2) aimed at reducing greenhouse gas emissions from road transport and building heating. Starting in 2027, this initiative will cap emissions at just over one billion tonnes annually, creating a carbon market where companies compete for allowances. While the system promises to drive significant environmental progress, it may also raise fuel prices unless governments take swift action to manage demand.
Key Goals and Mechanisms
ETS2 follows the model of the EU’s original emissions trading system (ETS), introduced nearly two decades ago. The original scheme targeted factories and power plants, requiring industries to pay for every tonne of carbon emitted. ETS2 focuses on high-emission sectors such as road transport and buildings, which have proven resistant to past mitigation efforts.
The cap will gradually decrease each year, supporting the EU’s broader climate goals. By 2030, the EU aims to achieve a 42% reduction in emissions from these sectors compared to 2005 levels. This measure aligns with the EU’s 2030 climate targets and sets the stage for meeting the 2040 climate goals.
Despite a steady reduction in overall EU emissions—down 8% from 2023 levels—household and transport emissions remain stubbornly high. Road transport accounts for nearly 20% of total EU emissions, while household emissions have seen only a 12% decrease since 2015.
Eleanor Scott from Carbon Market Watch noted that ETS2 could significantly lower the cost of renewable energy and channel funds into social climate programs. However, she emphasized that ETS2 alone cannot address all challenges and must be paired with complementary measures.
Addressing Social and Political Challenges
The introduction of ETS2 has sparked concerns about its social impact, particularly regarding potential increases in fuel and heating costs. Governments must adopt supportive measures to reduce demand for emissions allowances and prevent sharp price rises.
The EU has allocated €86.7 billion through the Social Climate Fund (SCF) to support those most affected by the transition, particularly individuals experiencing energy poverty and high transport costs. Still, questions remain about how an additional €200 billion in ETS2 revenue will be allocated to ensure fairness and public acceptance.
Peter Liese, a center-right lawmaker, has backed ETS2 despite broader resistance to other EU environmental policies within his party. He underlined the necessity of public consultation and well-designed social climate plans to build trust and secure cooperation from member states.
Implementation Hurdles
The rollout of ETS2 faces implementation challenges, as several member states have shown hesitation. In July, the European Commission initiated infringement proceedings against most EU countries for failing to adopt the revised ETS directive by the deadline.
Scott stressed that clear, transparent communication and public engagement are vital for the system’s success. Without these efforts, member states may struggle to implement ETS2 effectively, risking delays or inefficiencies.
ETS2 represents a bold step toward meeting the EU’s climate goals, but its success hinges on coordinated action among member states, strong public backing, and strategic use of revenues to support those most affected.
