Emission rights trading expands market

The European Commission tightens the fence to _CO2 of buildings and maritime and road transport

The European Commission (EC) is on track to make Europe the first climate-neutral continent by 2050. Maritime and road transport, on the one hand, and buildings, on the other, are the next sectors on which increasing limitations on greenhouse gas emissions are to be applied.

On 14 July, the EC presented a set of proposals to adapt the European Union’s (EU) policies on climate, energy, land use, transport and taxation to reduce net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.

This package of measures, referred to by the EC as Fit for 55, covers a wide range of areas: strengthening the current EU emissions trading system and applying emissions trading to new sectors; increased use of renewable energy; greater energy efficiency; faster deployment of low-emission modes of transport and the infrastructure and fuels to sustain them; alignment of fiscal policies with the objectives of the European Green Deal; measures to prevent carbon leakage; instruments to preserve and enhance natural carbon sinks.

Among all of them, the proposal for changes in the emissions trading system (see attached information with the explanation on the operation of the ETS or ETS, for its acronym in English) and its extension to maritime and road transport, in addition to buildings, stands out.

The European Commission wants to reduce _CO2 emissions by 55% by 2030

From 2026, the European Commission aims to apply a new emissions trading system to road transport fuels and buildings that, according to this institution, seeks to have a special impact on fuel suppliers, instead of on homes and car drivers, with the channeling of the income obtained towards aid to vulnerable households and investments in sustainable mobility.

In addition, from 2023 the application of the current ETS, currently limited to electricity and heat generation, energy-intensive industrial sectors and commercial aviation within Europe, will be progressively extended to the maritime sector (for three years from that date). As with the aviation sector, this regime will apply to all maritime traffic within the European Union (EU), in addition to 50% of crossings outside the EU.

In the case of air transport, already included since 2012 in the current ETS, a stricter limit will be set on the number of allowances for intra-EU flights and the free allowances currently enjoyed by this sector will be phased out completely until 2026.

The ultimate goal set by the European Commission is to achieve a reduction in greenhouse gas emissions from transport by 90% by 2050, with road transport now responsible for 20.4% of total emissions in the EU, maritime transport with another 4% of those emissions and air transport with 3.8%.

• What is the EU Emissions Trading System?

The EU Emissions Trading System (ETS) sets a limit on the total amount of certain greenhouse gases that can be emitted each year by entities covered by the system. That limit is reduced over time so that total emissions decrease.

Since the introduction of the EU ETS in 2005, emissions have been reduced by 42.8% in the sectors covered: electricity and heat generation, energy-intensive industrial sectors and commercial aviation within Europe. In this framework, regulated entities purchase or receive allowances, which they can exchange with each other if necessary. If, at the end of the year, one of these regulated entities manages to reduce its emissions to the point of improving the annual limit set, it can keep the ‘saved’ allowances to cover its future needs or sell them to another facility that does not have allowances.

On 14 July, the European Commission proposed to phase out the free allowances currently enjoyed by aviation, as well as including emissions from maritime transport in the EU ETS. In parallel, it proposed to apply emissions trading to other sectors through a new independent regime, with priority given to the distribution of fuels for road transport and heating of buildings.

Price on heating carbon

As important as the proposals for transport are the building plans, which according to EC estimates now account for 40% of the energy consumed in the EU and 36% of energy-related greenhouse gas emissions. In the Fit for 55 package, the EC envisages issues such as the revision of the directives on energy efficiency and renewable energy in buildings, but also the inclusion of construction fuels in the new independent emission allowance scheme.

Road transport is now responsible for 20.4% of total emissions in the EU

Thus, the new emissions trading system for construction fuels “will set a price for polluting fuels, encouraging producers to innovate and invest in clean energy and to offer it to end users”, as described in the documentation published by the European Commission.

The new emissions trading scheme for buildings will also “ensure a level playing field for all heating options, complementing the current carbon price for electric heating and district heating with a carbon price for domestic heating” and “generate revenues for Member States that can be used to support the decarbonisation of buildings”.

It is precisely with this income generated that we want to finance the new Social Climate Fund (see attached information for a more detailed explanation), through which we want to provide financial support to citizens, particularly vulnerable households, in order to invest in heating renovation systems.

• New Social Climate Fund

Endowed with a budget of 72,200 million euros from the auction revenues generated in the new emissions trading system (ETS) for buildings, its purpose is to address the social repercussions that the implementation of this new ETS will have.

The new Social Climate Fund aims to benefit vulnerable households, especially those in energy poverty, as well as to support state measures and investments that encourage the renovation of buildings for these households, by co-financing Member States’ direct income support measures for vulnerable households, until the moment of having reached the planned investments.

• Fuel suppliers

This same Social Climate Fund is also the one that will serve ,to address the social repercussions derived from the probability that fuel suppliers will pass on part of their carbon costs to consumers who buy road transport and heating fuel’.

The new emissions trading system proposed by the EC for road transport and buildings aims to regulate, insist from this institution, fuel suppliers instead of households and car drivers.

With its entry into operation from 2025 and an emission limit set from 2026, fuel suppliers will have to obtain a greenhouse gas emission permit and report their emissions for the years 2024 and 2025. From there, the ceiling of the new ETS will be reduced annually to achieve a 43% reduction in emissions by 2030 compared to 2005.

The logical consequence of these higher requirements is the impact of the added costs on citizens, SMEs and the self-employed. With the design of this new Social Climate Fund, it is intended to better delimit the actions that must be carried out by the various Member States of the Union to prevent this from impacting on the most vulnerable groups.

This is a notable difference from the use that has been made to date of revenues from emissions trading in electricity generation or large industry. In the current ETS, revenues from auctions are mainly allocated to Member States’ budgets and are partly used to combat climate change, but not always.

Under the current EU ETS, Member States are obliged to allocate at least half of their auction revenues to support the reduction of greenhouse gas emissions, to deploy renewable energy and carbon capture and storage, and to improve energy efficiency and district heating.

Between 2018 and 2020, Member States’ revenues from these auctions – which amounted to between €14 billion and €16 billion per year in the EU as a whole – were spent, by an average of 70%, on climate and energy-related purposes.

A legislative package in full debate

In the Commission’s new proposal, Member States will have to spend revenues from emissions trading auctions on climate and energy-related projects, including decarbonisation in the road transport and buildings sectors. This includes investments in mobility and zero-emission vehicles, energy efficiency improvements and building renovations.

In addition – and this is where the big difference comes in – Member States will need to use a part of their revenues from emissions trading in the road and building transport sectors to support vulnerable households and transport users, and match funding from the Social Climate Fund.

• In parliamentary procedure

Following the presentation of the European Commission’s Fit for 55 package of proposals, these measures are now in the parliamentary phase, with the European Parliament and the Member States tasked with negotiating and adopting a legislative package to achieve the targets set for 2030.

“There are more doubts than certainties: sustainability must be economic, social and environmental” – Beatriz Belinchon, CETM

Parliamentary sources see in the new emissions trading rights regime for road transport the great battlefield that is being configured at this stage. And, to a lesser extent, also the endowment of the new Social Fund for the Climate and the implementation of the new Border Adjustment Mechanism for Carbon emissions (see attached information on the barriers to ‘carbon leakage’ for a detailed explanation).

From one of the affected sectors, Beatriz Belinchon, from the Department of EU Relations and Regulations of the Spanish Confederation of Freight Transport (CETM), is clear: “There are more doubts than certainties”.

“As the new STDs are being proposed for transport and building,” explains Belinchon, “we do not know what character their inclusion will have. It is not yet known if it will have a finalist character. That is, that what the transport sector generates is destined to the sector itself, for example to the renewal of fleets, or it will not be so. It’s essential to know that.”

“Nor do we know if these revenues – continues this CETM spokeswoman – will go to infrastructure or how the implementation of emissions trading will be regulated with CO taxation.₂ that is already here and that makes the transport sector already contribute to the General State Budgets 19,000 million euros a year”.

To all this, Belinchon adds another element: “Today, road freight transport does not have an equally efficient alternative to diesel. Heavy vehicles with hydrogen cells, today do not exist. Neither electric trucks, only light vehicles. And, in the latter case, the price of an electric van skyrockets by 40% compared to another diesel. Companies can’t generate a new fleet so quickly, because 2026 is right here.”

For all these reasons, “we consider that the most appropriate thing is to ask for a transitional period to have the technology developed, because we have no alternative where to move today. Sustainability must be economic, social and environmental.”

And, although the purpose of these new emission rights is to involve the fuel supplier, and not the carrier, she is skeptical: “If so, there is no doubt that this cost will end up being passed on, so we have no choice but to oppose it, because now is not the time to establish additional taxation to the sector.”

Source: Diari de Tarragona