The European Commission has established a new emissions trading scheme (ETS2) aimed at reducing greenhouse gas emissions from road transport and buildings. Starting in 2027, emissions from these sectors will be capped at just over a billion tonnes per year. This cap will affect fuel prices unless governments take swift action to curb demand. Companies will compete for emissions allowances in a newly established carbon market.
The emissions cap for the first year will be set at just over one billion tonnes of CO2 equivalent. The number of allowances auctioned will reflect this cap. In 2023, total EU emissions amounted to approximately 3.2 billion tonnes, marking an 8% decrease. The new system focuses on two sectors where emissions have remained high despite previous efforts.
EU’s Climate Goals and the Impact of ETS2
The ETS2 is similar to the EU’s original emissions trading system (ETS), which launched nearly two decades ago. The original ETS required factories and power plants to pay for each tonne of carbon emitted. However, the new ETS2 will target road transport and building heating, which have seen limited progress in reducing emissions.
Recent data shows that emissions from households fell by only 12% between 2015 and 2022, despite a variety of EU regulations on energy efficiency. Road transport contributes to roughly one-fifth of the EU’s total emissions and has seen minimal progress in recent years.
To meet the EU’s 2030 climate goals, the cap will be reduced annually. By 2030, the EU aims to lower emissions from these sectors by 42% compared to 2005 levels. Eleanor Scott from Carbon Market Watch notes that the ETS2 will play a critical role in achieving the EU’s 2040 climate targets. It will help make renewable energy more affordable and generate funds for social climate policies.
Addressing Social Impacts and Government Challenges
Concerns have arisen about the social impact of the new ETS2, particularly regarding potential increases in fuel prices. Eleanor Scott emphasized that member states must recognize that the ETS2 is not a “silver bullet” and that governments need to prepare for the system’s implementation by adopting complementary measures to reduce emissions. These measures would lower the demand for allowances and help prevent price increases.
Peter Liese, a center-right lawmaker, expressed his continued support for the ETS2 law, despite broader opposition within his party to other EU environmental policies. However, some governments have shown reluctance 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 well-designed social climate plans, with broad public consultation, are essential. The Social Climate Fund (SCF) will provide €86.7 billion in targeted support for people facing energy poverty and high transport costs. However, the use of the remaining ETS2 revenue—potentially over €200 billion—will be crucial in ensuring the system’s fairness and securing public support.