If emissions from transport and heating are not reduced, EU ETS 2 will become more expensive

The EU’s new carbon pricing system for road and heating fuels (ETS2), due to be introduced across the bloc in 2027, could lead to a greater price increase than originally expected, European lawmakers told Euractiv.

From 2027, the EU will begin pricing CO2 emissions from buildings and road transport under a new carbon pricing system known as the Emissions Trading System 2 (ETS2). When the original proposal was approved, the estimated allowance price was around 45 euros per tonne of CO2. That would correspond to an additional cost of about 10 cents per litre of diesel or petrol.

The market

In principle, however, this is not a fixed amount. At its core, the allowance price is determined by supply and demand. If Europe is less successful in gradually reducing its dependence on energy sources with high CO2 content, demand for CO2 emission allowances will rise, and the price of carbon will increase accordingly.

“Anything is essentially possible in terms of prices,” Michael Pahle, an expert on carbon markets at the Potsdam Institute for Climate Impact Research (PIK), said last year ahead of the parliamentary vote.

He added that it was impossible to say with certainty whether the additional price stability mechanism would actually ensure that the price did not exceed the aforementioned level of 45 euros per tonne of carbon dioxide.

The EU’s chief negotiator in the European Parliament, Peter Liese of the EPP group and Germany’s CDU, also acknowledged that the amount was not fixed.

“The trilogue agreement obviously cannot absolutely guarantee that prices will not exceed 45 euros per tonne, but the likelihood is quite high, especially in the first years, including 2029,” Liese said.

Emissions are falling slowly

Today, Liese says he is more pessimistic about keeping the price below 45 euros. He explains this by saying that “we are experiencing setbacks in mobility and buildings”.

Emissions from buildings, which are mostly caused by heating systems, and from road transport, which are mostly caused by passenger cars and trucks, are currently falling more slowly than the European Commission expects.

The easing of legislation pushing for emissions reductions in households and transport—for example, under the EU’s buildings directive—is not helping either. The effective phase-out of internal combustion engines by 2035, meanwhile, will only take effect after EU ETS 2 enters into force.

The above could lead to higher demand for emission allowances in 2027 and, therefore, a higher carbon price.

Green negotiator Michael Bloss acknowledged that such a price increase would threaten the system’s success, “because it is clear in the EU that a very high price is not politically feasible in southern Europe”.

Other lawmakers also share concerns that prices could exceed 45 euros.

“Current studies assume that the price could rise to as much as 200 euros per tonne,” said Tiemo Wölken, a German MEP and environment policy coordinator for the centre-left S&D group, citing research by the German think tank Agora Energiewende.

To prevent “social imbalances”, more funding is needed in the EU’s 87 billion euro Social Climate Fund, which is intended to mitigate the impact of the new carbon price on the poorest, Wölken said.

Reorganization

Liese spoke to Euractiv about the need for another overhaul of the EU’s emissions trading system, his proposal for a central bank for CO2, and his campaign for his party to stick to the EU’s climate targets.

In addition, Liese says further, more targeted support is essential to help low-income households transition to climate-neutral alternatives: “Social problems exist primarily among those who earn below average.”

“Relaxing ETS2 does not solve a single problem. Other measures would then have to be taken to reduce emissions,” Liese said, adding that these measures “could be more expensive and meet with greater opposition”.