The European Commission has introduced a new emissions trading scheme (ETS2) aimed at reducing greenhouse gas emissions from road transport and buildings. Set to begin in 2027, the scheme will cap emissions from these sectors at just over a billion tonnes per year. Fuel prices could rise unless governments take immediate action to reduce demand. Suppliers will compete in a new carbon market for emissions allowances.
The Commission has set the cap for the first year at slightly over one billion tonnes of CO2 equivalent. This figure will be reflected in the number of allowances available for auction. In 2023, total EU emissions stood at 3.2 billion tonnes, following an 8% reduction. The ETS2 targets two sectors—road transport and building heating—that have had consistently high emissions despite past regulations.
Achieving EU Climate Targets
The ETS2 builds on the original EU emissions trading system (ETS), which began nearly 20 years ago. The original ETS required power plants and factories to pay for every tonne of carbon emitted. The new system will now target road transport and buildings, two areas where emissions reductions have been slow.
Recent data from the Buildings Performance Institute Europe shows that household emissions fell by just 12% from 2015 to 2022, despite numerous EU regulations designed to improve energy efficiency. Road transport, accounting for about one-fifth of the EU’s total emissions, has seen limited improvement in recent years.
To meet the EU’s climate target for 2030, the emissions cap will be gradually reduced each year. By 2030, emissions from these two sectors are expected to drop by 42% compared to 2005 levels. According to Eleanor Scott from Carbon Market Watch, the ETS2 will be critical to meeting the EU’s 2040 climate goals. It will help lower renewable energy costs and generate funds for social climate policies.
Social Impacts and Implementation Challenges
While the ETS2 aims to drive emissions reductions, concerns about its social impact, particularly potential fuel price hikes, have arisen. Eleanor Scott noted that member states must understand the ETS2 is not a “silver bullet.” Governments need to adopt complementary measures that reduce emissions, thus lowering demand for allowances and preventing price increases.
Peter Liese, a center-right lawmaker, remains committed to the ETS2 law, despite opposition from his party on other EU environmental policies. However, some governments are hesitant to fully implement the scheme. In July, the European Commission initiated infringement proceedings against most EU member states for failing to adopt the revised ETS directive by the legal deadline.
Scott believes that effective social climate plans, including public consultation, are vital for ensuring fairness. The Social Climate Fund (SCF) will provide €86.7 billion to support those facing energy poverty and high transport costs. However, how the remaining ETS2 revenue—potentially over €200 billion—will be used will be crucial to ensuring the system’s fairness and securing public support.