Jargon alert – what does a carbon market for transport mean?

January 30, 2023

T&E explains the impact of emissions pricing for shipping, aviation and cars.

Back in December, the most used acronym in the Brussels climate bubble was ETS. Spelled out, it stands for Emissions Trading Scheme. Still confused? We break it down and explain what it will mean for transport.

To incentivise polluting industries to reduce their emissions, governments set a cap on the maximum level of emissions a sector is allowed to emit. The cap is reduced over time so that total emissions fall. Governments create permits, or allowances, for each unit of emission. 

Companies must obtain and surrender a permit for their emissions. They can obtain permits from the government or through trading with other firms.

For firms that are too polluting compared to competitors, it becomes too expensive to buy permits and the company will have to cut back emissions. In other words, emitting comes at a price. 

Emissions trading is a key tool used by governments to reduce emissions – including in the transport sector. In Europe, three main modes of transport concerned are cars, planes and ships.

Cars: the new kid on the block 

In the EU, the ETS has been in place since 2005 for energy-intensive sectors like power, steel works, cement, chemicals and more. But the latest addition to the list are cars and heating. This time it is not companies, but those who drive polluting vehicles and use gas boilers who will pay for their pollution.

To avoid a logistical nightmare of tracing back the pollution of individual cars and boilers, intermediaries such as companies selling fuel for cars (like Shell and Total) and heating would be required to show compliance with regulation by surrendering pollution permits.

Ultimately, the end consumer would bear the cost. Wealthier households, who drive and consume the most for heating and cooling, will ultimately pay more. But low-income households risk spending a bigger chunk of their income on energy, with little left to switch to clean alternatives. 

This is why EU governments simultaneously introduced a big pot of money – the Social Climate Fund – to channel funds (generated by the selling of carbon permits) to the most vulnerable households. This will help low-income families to access affordable public transport, sustainable heating and cooling appliances and adequately insulate their homes.

Planes: long-haul flights get away scot free

The ETS for aviation has been around since 2012 – but only affected flights within the EEA. In December, negotiators had to decide whether this would be extended to long-haul flights – which represent 58% of Europe’s aviation CO2 emissions. But this failed and the size of the ETS is doomed to stay the same. This makes international aviation one of the only sectors of the EU economy that doesn’t fall under an emissions cap or price. 

As the carbon price of aviation is passed on to flyers, average European families traveling within Europe for their annual holiday will continue to pay much more for their CO2 emissions than frequent long-haul flyers. 

Yet, airlines still found reason for outcry. The deal will see free allowances be phased out – an end to free pollution permits, which airlines have benefitted from for years. 

Ships: putting a price on an outlaw sector

Until now, there was no carbon market for shipping. But this took a drastic turn in the final days of 2022.  Starting in 2024, shipping companies will be required to pay for emissions from both domestic and international voyages to and from the EU. While the system will initially cover only CO2, methane emissions will quickly be introduced into the system in the following years. Unlike any other sector, shipping companies will be given no free pollution permits.

While pollution charges under ETS are unlikely to bridge the price gap between fossil marine fuels and green alternatives, the system will still generate substantial amounts of revenues that the EU and member states can reinvest in green technologies for ships, such as hydrogen-based e-fuels.

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