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Why is the EU's new Emissions Trading System so controversial?

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By Euronews
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The new Emissions Trading System will target fuel suppliers of road transport.
The new Emissions Trading System will target fuel suppliers of road transport.   -   Copyright  John Bazemore/Copyright 2017 The Associated Press. All rights reserved.
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Brussels has plans to irreversibly transform the EU's economy.

The European Commission has put forward a far-reaching raft of 13 draft laws to ensure the bloc cuts greenhouse gas emissions by at least 55% before the end of the decade, as it aims for climate neutrality by mid-century.

The legislative package, known as "Fit For 55", has been hailed as a seminal moment in Europe's fight against climate change, as well as a potential blueprint for other countries to follow.

But the European Commission's announcement has also proven divisive and is already under attack from different corners of the continent.

Among the biggest headlines coming from Brussels was a proposal to create a new, separate Emissions Trading System (ETS) to slap an extra charge on the emissions of the residential and transport sector. In practice, the scheme will make fuel suppliers of domestic heating and combustion cars pay a price for the carbon that their products release into the atmosphere.

The idea was an immediate cause for concern: fuel suppliers will certainly pass the additional cost onto consumers, who will struggle to pay the higher bills and refuel their cars.

Such palpable increase in daily expenses, some said, could lead to social discontent and unrest, similar to what happened in France when the government tried to introduce a fuel tax and inadvertently provoked the Yellow Vest movement. The backlash could in turn force Brussels and national governments to put on hold other green initiatives and reforms, arguably a delay that no major economy is able to afford given the situation with climate change.

But how accurate are these gloomy predictions?

A new Emissions Trading System

The EU's new scheme will mirror the existing Emissions Trading System. Launched back in 2005, the pioneering system covers 31 countries (the 27 member states plus Iceland, Liechtenstein and Norway) and involves more than 10,000 powers plants and industrial installations.

The ETS is based on a "cap and trade" principle. On the one hand, the EU sets a cap on the maximum amount of greenhouse gases that the installations can release. On the other hand, it creates permits for each unit of emitted carbon. Companies can buy these permits and trade them among each other to fulfil their annual needs. The cap is tightened over time and permit prices gradually increase. This trend guarantees that emissions continue to decrease.

The current price under the ETS exceeds €50 per ton of emitted carbon, up from €33 in early January.

The EU's ETS is the world's largest carbon market and comprises a variety of polluting sectors, such as electricity and heat generation, commercial aviation, oil refineries, steel production and several chemical products. All companies that operate in these fields are required to participate in the ETS and buy the permits, although exemptions can be granted in certain cases.

In the eyes of the European Commission, the ETS has been an unmistakable success: emissions in the sectors covered have decreased by 42.8% since the 2005 launch.

The system has been praised for being a market-based instrument, as opposed to conventional, top-down regulation. The ETS is credited with motivating private companies to innovate and embrace sustainability: the greener their business become, the lower the price they have to pay.

But the scheme has an obvious weakness: its current design only tackles around 41% of the EU's total emissions, a figure the European Commission considers insufficient to reach climate neutrality.

The case in favour: all carbon must be taxed

Brussels is determined to wage war on carbon dioxide, the most prevalent greenhouse gas and the main driver behind climate change.

"Our current fossil fuel economy has reached its limits. And we know that we have to move on to a new model," declared European Commission President Ursula von der Leyen while presenting the Fit For 55 package.

"We're putting a price on carbon so people have the incentive to use less carbon and we put a premium on decarbonising so that we stimulate innovation and adaptation," added Frans Timmermans, the European Commission's vice-president in charge of the European Green Deal.

The European Commission argues that all sectors – no exceptions – must contribute to the massive greening of the EU's economy. This collective effort, the executive says, cannot exclude two sectors as polluting and dirty as buildings and road transport.

Altogether, buildings across the EU are responsible for 40% of energy consumption and 36% of greenhouse gas emissions. Meanwhile, the transport sector generates around 30% of emissions, a vast majority of which (more than 70%) come from road transport, such as cars, trucks and buses.

Even more problematic, emissions from transport continue to increase, while those from other sectors decrease. The European Environmental Agency estimates that, if the present trend persists, transport emissions will increase by 32% by 2030 compared with 1990 levels.

In a bid to prevent such a dramatic scenario, Brussels wants to bring the two sectors under a separate, stand-alone Emissions Trading System focused on companies that supply heating and road transport fuels (gas, diesel, petrol). The maritime and aviation sector will fall under the original ETS.

The European Commission plans to make the new ETS operational by 2025 and set a cap on emissions from 2026 onward. The system will see fuel suppliers buy and trade emitting permits to meet their needs without reaching the maximum cap, which will be reduced over time.

The ultimate goal is to cut emissions from buildings and road transport by 43% compared to 2005 levels before the decade is over.

Speaking to reporters, Timmermans said a market-based system like the ETS was the best approach to help companies adapt to the green transition. Timmermans said the scheme was not entirely new because households are already affected by the existing ETS, which taxes carbon from the electricity that citizens use for everyday appliances.

Valeria Mongelli/Copyright 2021 The Associated Press. All rights reserved
Vice-President Timmermans defended the new ETS and said he was willing to fight for it.Valeria Mongelli/Copyright 2021 The Associated Press. All rights reserved

Brussels, however, is aware of the inherent risk in the new ETS: as soon as fuel suppliers are obliged to pay an extra charge for their carbon emissions, they will not hesitate to transfer those expenses directly to their consumers, who will see how bills gradually drive up.

The European Commission itself admits this possibility is "likely" to happen and, to cushion the impact, will set up a Social Climate Fund to provide €72.2 billion of EU funds to member states between 2025 and 2032. National governments will be expected to match the figure and push the total budget to €144.4 billion, approximately €20.62 billion each year. The European Commission will also include a specific mechanism in the ETS to control excessive hikes in the carbon price.

"[The Social Climate Fund] will support investments to tackle energy poverty and to cut bills for vulnerable households and small businesses. So this is real support for those that need it most, while the pricing is effective," said von der Leyen, who added that, while the green transition must remain fair and social, Europe can't lose the overall perspective of decarbonising.

The Commission is now pinning its hopes on the incoming "renovation wave" to speed up the modernisation of households and the electrification of vehicles, two trends that might protect households from price hikes under the new ETS. European countries have earmarked a significant share of their post-pandemic recovery funds to renovate public and private buildings and make them more energy-efficient and resilient to extreme weather.

Additionally, Brussels intends to phase out combustion engines: all new cars registered in the EU as of 2035 will be zero-emission. The fewer polluting vehicles on the road, the lesser the impact of the ETS.

The case against: vulnerable households will suffer

The Fit For 55 package has received a mixed welcome from environmental organisations, who welcomed its far-reaching quality but predicted the targets will fail to meet the Paris Agreement goals.

In the case of the new Emissions Trading System, green activists didn't voice their usual complaint of "it doesn't go far enough" but instead argued the opposite: it goes too far – or in the wrong direction.

Greenpeace has called the Fit For 55 initiative "unfit" for the climate crisis and said the new ETS "could harm poorer households, with no guarantee of meaningful emission cuts". The World Wide Fund for Nature (WWF) said that "alarmingly, the Commission wants citizens and other sectors to foot some of the bill for industrial decarbonisation".

"Carbon pricing will only play a small part in cutting road transport emissions, but there can be a role for it," said William Todts, executive director of Transport & Environment, an organisation that advocates for zero-emission mobility.

"The Commission's proposal will be rolled out slowly with very low carbon prices and the revenue will flow back to low and middle-income families. Despite this very minimalist approach, the plan faces a lot of opposition and it may be years before it’s agreed."

In a very critical study carried out by Cambridge Econometrics and endorsed by the European Climate Foundation, researchers concluded the system will fail to reach the 43% emission reduction target in 2030 because the demand for transport and heating fuels is relatively inelastic, making the sectors unresponsive to a carbon-pricing scheme. The setback will put more pressure on other sectors to decarbonise faster and result in a loss of competitiveness.

The study estimates the new ETS will "push up average spending on gas-fuelled household heating by 30% and increase the cost of fuelling a fossil fuel vehicle by 16% in 2030" and predicts low-income households will be the hardest hit because they lack the financial means to invest in new, cleaner technologies to replace their old, dirty devices.

"Low-income households are also more likely to be in rental properties, where split incentives (the owner pays for the installation of the heating technology, but the tenant pays the ongoing bills) substantially reduce the take-up of low-carbon technologies when these have higher purchase prices," researchers wrote.

Similar concerns were raised by Pascal Canfin, a French MEP who chairs the European Parliament's environment committee and had previously called the new ETS "political suicide". Wring on Twitter, Canfin said the system worked for "companies and not households facing short-term constraints".

The lawmaker also warned that higher energy bills for ordinary citizens could lead to an EU-wide protest movement akin to France's Yellow vest movement ("gilets jaunes"), which was caused, among other things, by plans to introduce a diesel tax.

While the Yellow Vest months-long protests grew to incorporate other grievances and had a distinctly French character, the riots served to illustrate the thin line between protecting the planet and protecting the middle class, two objectives that have become increasingly at odds as the climate crisis worsens and governments realise that more drastic measures are required.

The growing tension is poised to emerge in full view when the negotiations around the new ETS kick-off between the EU's two co-legislators, the European Parliament and the EU Council, which often espouse diverging views on climate action. For the time being, support for the system is rather discrete, coming mostly from the Commission and some sectors in Germany.

Critics argue the proposal vastly favours German carmakers because, for them, a market-based solution is more preferable than any kind of regulation laying out new stringent CO2 standards, which force manufacturers to spend more time and resources on innovation. The Commission recently accused three of Germany's largest carmakers (Volkswagen, BMW, Daimler) of forming a cartel and colluding to avoid using the full potential of emission-cleaning technology for diesel cars.

The next two years will be crucial in shaping the Fit For 55 package, including the new – and controversial – Emissions Trading System. External developments, like the devastating floods that took place in Europe the day right after the Commission's presentation, will undoubtedly influence the political debate and highlight the need for radical action.

It's still unclear how much the draft law underpinning the ETS will be changed and amended. The final agreement between the co-legislators could further water down the system until it becomes innocuous and irrelevant – and completely ineffective.

According to estimates by Transport & Environment, the initial carbon price under the new ETS will be €25 per tonne of CO2, which will translate into an extra 5 cents for diesel and petrol prices in 2026.

"If year after year, all member states achieve their national climate targets through other measures," the organisation said, "the theoretical price of the new ETS could even be zero."