A carbon market for road transport: much ado about nothing?

July 15, 2021

‘When it rains in Paris, it drizzles in Brussels’ is a famous Belgian proverb. It is testimony to the French influence on Belgian policymaking. Similarly, if you want to weather the storms of European politics, these days it’s advised to keep track of what’s going on in the Kanzler Tasche. There’s no better example of this German influence than the newly proposed carbon market (ETS) for road transport and buildings.

Environmentalists didn’t ask for it. In fact, T&E and others spent the better part of the last decade arguing against road ETS which was at the time proposed as an alternative to vehicle CO2 standards. Its introduction is the result of years of pressure from German carmakers and Angela Merkel’s Christian Democrat party. After years of falling on deaf ears, the idea finally found a champion in none other than Ursula von der Leyen, the first German Commission president in recent memory.

Despite hesitation and outright opposition from many member states, civil society and even the EU’s ‘climate czar’ Frans Timmermans, Ms von der Leyen and Germany got what they wanted. Or did they? The new ETS only starts in 2026 and will not replace increased binding national climate targets, nor more stringent car CO2 standards.

The carbon price will start at a low level, with a price control mechanism preventing prices from going too much higher. €25/tonne of CO2 means an increase of diesel and petrol prices of around 5 cents in 2026 – pretty close to normal price fluctuations. If year after year, all member states achieve their national climate targets through other measures, the theoretical price of the new ETS could even be zero. In addition, member states are asked to make part of the money flow back to low- and middle-income families. Their social measures will be co-financed by a new European social fund, giving the EU new powers to support countries’ green social policies financed through the ETS.

Still, the proof of the pudding will be in the eating. Will the price control mechanism be enough to address the downsides of market forces: uncertainty, fluctuating prices and speculation? A clear minimum and maximum price for the ETS would certainly be much more transparent. The size, success and timeliness of member states’ social compensation plans also remains to be seen. If it doesn’t pan out, national politicians will be quick to blame Brussels for their failure in mitigating increased fuel prices.

While the German dream has therefore been massively toned down, the proposal still faces immense opposition, mostly from central and eastern European member states and from France and Italy. Some evoke the spectre of a European gilets jaunes movement but with prices as low as they are and the scheme only entering into force fully by 2028 this ‘minimalist’ ETS may provoke less fury than Macron’s carbon tax which coincided with tax cuts for the rich as well peak oil prices.

So why would anyone other than Germany put their weight behind the proposal? Could this ETS fix Europe’s largest climate problem: the ever-rising emissions from road transport? Perhaps after 2030, but not in this decade and certainly not on its own. A five cent increase in fuel prices won’t change people’s behaviour if there aren’t affordable zero-emission alternatives. That’s why it should not only be Europe’s, but also German conservatives’ first priority to negotiate ambitious car CO2 standards.

But that doesn’t mean making the oil industry pay a tiny bit is a bad idea. It is fundamentally smart fiscal policy to tax expensive oil imports and use the revenues to make our economies less dependent on imported fossil fuels. In time, and especially when electrification takes off, the scheme could also evolve towards higher prices and to ensure fuel prices at the pump don’t fall below a certain level.

Politicians negotiating this package should be wary of that. A road ETS can have added value in the policy mix, both now and in the future. And perhaps it helps conservatives and climate hawks accept the more stringent CO2 standards and higher national climate targets that are so desperately needed – without backdoors and loopholes.

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