What is the EU ETS 2?
Summary
The EU is introducing EU ETS 2, a new emissions trading scheme to include the building and transport sectors, aiming for carbon neutrality while protecting lower-income households through redistribution mechanisms and price stabilization. This initiative expands carbon pricing to sectors previously excluded due to socio-economic concerns, promoting responsible investing and green finance within the European carbon market.
A new emissions trading scheme (ETS), the EU ETS 2, is soon to be introduced to include the building and road transport sectors. It will run alongside the existing EU ETS to ensure that carbon pricing remains effective while safeguarding social and economic stability.
Building construction and transport - high carbon intensity sectors
The building construction and transport sectors are major sources of carbon emissions in the European Union. These sectors are responsible for 19% and 12.4% of emissions respectively, and are not currently included in the existing EU ETS. To achieve the EU’s ambitious climate targets, it is crucial to account for such high-emission sectors into a carbon pricing scheme.
The current exclusions from the EU ETS
At present, these sectors are excluded from the EU ETS to prevent potential increases in energy costs, which could disproportionately affect lower-income households. The risk is that higher prices for heating and transportation could place an additional financial burden on these vulnerable groups, potentially making energy less affordable. It is always sensitive to involve sectors that might impact these groups in major and ambitious climate initiatives. Regulators aim to ensure that these efforts do not harm socio-economic health.
A solid redistribution mechanism
To address these concerns, the EU Commission is developing the EU ETS 2, a new carbon pricing scheme set to launch around 2027 or 2028. This scheme will include enhanced redistribution mechanisms to provide direct compensation to those most impacted by rising costs. The Social Climate Fund is a central component of EU ETS 2 - it will help mitigate socio-economic impacts by redistributing revenues. The purpose is to fairly dispatch the proceeds from the sale of the EUA2 quotas in order to compensate the affected lower income households.
Price stabilization mechanisms of the EU ETS 2
The EU ETS 2 will include mechanisms to prevent both excessive price volatility and too rapid price surges. If prices were to rise significantly and remain above the predetermined threshold of €45 for an extended period, supply interventions would be implemented to stabilize the market. While this is not a strict price cap, it is a flexible price mechanism designed to adapt to real-life supply and demand dynamics.
The EU ETS is growing more ambitious through various channels. It is accelerating the pace of supply reduction, phasing out free allocations, and sending stronger decarbonization signals on the international stage. It is also getting to include sectors previously considered too socio-economically sensitive for carbon pricing - transportation and building, and perhaps agriculture in the years to come.
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