Cars and heating will have to pay CO ₂ emission rights from 2026

To comply with European Parliament Regulation 2021/1119 establishing climate neutrality by 2050 and a reduction in carbon dioxide (CO) emissions₂) by 2030 of 55% compared to 1990 levels (or 61% compared to 2005) the European Union has proposed more restrictive measures to achieve these objectives.

Thus, through a communication to Parliament and the Council, the European Commission proposes, among others, that from 2026 they be incorporated into the CO emissions market₂, road transport, buildings (i.e. the consumption of natural gas for heating and air conditioning) and maritime transport.

The so-called Fit for 55 package includes a series of proposals “interconnected with more ambitious legislation”, says the Commission. Specifically, eight laws are reinforced and five new initiatives are presented in various policy areas and economic sectors: climate, energy and fuel, transport, construction, land use and forestry.

Convinced that the emission allowance market has proven over the past 16 years to be “an effective mechanism to reduce emissions and generate revenues to support the energy transition”, Brussels has chosen to include new sectors rather than address stricter regulatory changes on fuels, renewable energy, energy efficiency and taxation.

In addition to eliminating the current free emissions or subsidies received by the aviation sector, road transport using fossil fuels and buildings, which are difficult to decarbonise, will have to buy CO rights.₂ from 2026, according to the proposal that should be transformed into a directive when the consensus of the Member States is achieved. But the aforementioned emission allowances would not be paid directly by consumers, but by the fuel manufacturer or the boiler gas, which would then be transferred to the price to be paid by the end user.

According to the EC communication, “the system will focus on upstream fuel suppliers, putting the responsibility on fuel producers, rather than requiring individual households or users to participate directly.” In addition, emissions from road transport and buildings will be capped so that total emissions fall.

It is the same as with electricity, whose current price escalation is partly due to the cost of _CO2 rights paid by the electricity companies they generate with fuels, such as coal or gas. In this sense, the debate focuses on a paradox: why do electric cars indirectly pay the cost of _CO2 rights internalized in the price of electricity and, instead, do not pay for vehicles with combustion engines?

Almost half a million new electric vehicles were registered in the EU in the last quarter of 2020, accounting for 17% of the market, and the fleet of electric vehicles doubled in one year.

Incentives

Brussels believes the measure will incentivize marketers to offer “cleaner fuels for existing vehicles.” For its part, regarding heating and air conditioning, the system will also promote “cleaner fuels; the payback periods for investments in appliance renovation and the switching of heating and cooling fuels in old buildings will be shortened.”

From a fiscal point of view, a harmonisation of the minimum tax rates for heating and transport is proposed.

At the moment, energy companies and airlines are obliged to pay emission allowances for their activity, in the latter case, for intra-Community flights or countries with agreements. They also pay to pollute energy-intensive industrial sectors, such as crude oil refineries, steel mills, aluminium metals, cement or paper. If the proposal succeeds, the maritime sector will also have to turn to the European emissions market, gradually from 2023 to 2025.

On the other hand, the EC proposes “an adjustment of carbon borders”. A mechanism that will price imports of a limited number of highly polluting goods.

European authorities warn that some countries outside the EU may consider these measures as a tariff equivalent to the cost of emission rights on their exports to Europe and could take action or file lawsuits with the World Trade Organization (WTO) for considering it a violation of the agreements.

A SOCIAL FUND OF 72,200 MILLION

New revenue. The obligation for new sectors, such as road, maritime and building transport, to pay _CO2 rights in the future, will mean additional revenue “to ensure a just transition and the use of renewables”, says the European Commission. It considers that thanks to the rights market, emissions have fallen by 24% compared to 1990, when the economy grew in that period by 62%.

Budget. A new Social Climate Fund will provide specific revenues to states to mitigate costs “for people most exposed to increases in fossil fuel prices during the energy transition,” the EC adds in its communication. Specifically, the fund will provide €72.2 billion in current prices over the period 2025-2032 in the EU Budget from the proposed new system. The final amount will depend on the price of carbon.

Vulnerable. The hardest hit will be middle- and low-income households, transport users and small businesses. The volume of the fund will in principle be equivalent to 25% of the expected revenues of the new measures that will affect road transport and construction, from 2025. It will be supplemented by national contributions of at least 50 per cent.

Source: The Country