Road transport in the EU ETS: a high-risk, low-reward strategy

Getting the prices right has always been at the heart of our work. We’ve worked on fuel taxes, road charging, abolition of harmful subsidies and the like for decades. This is because we value the nudge price signals provide and the long term impact they have on things like how many kilometers people drive (compared to Europeans, Americans consume three times more fuel per capita), how much they fly or the type of vehicles people buy. We also think taxing polluting transport is economically smarter than taxing labour or other productive activities.

So as environmentalists we are supportive of carbon pricing. And yet, we remain profoundly skeptical (as well as many other NGOs and consumer groups) about including road transport in the EU ETS (aviation and shipping are different, see below).

The first and fundamental problem is that the EU ETS pretends to be much more than just a carbon price. Through its cap and trade dynamics, the ETS supposedly fully regulates emission reductions in all sectors it covers. In theory that reduces the space for, and need for other policies such as mandates, national carbon taxes and the like.

Despite all Timmermans’ assurances to the contrary, the EU ETS does compete politically with CO2 standards. The EU ETS inclusion was always promoted as the solution to transport emissions by German carmakers, economists and conservative politicians. The recent renewed push, once again, comes from Germany and its mighty auto industry (VDA). Sure, we have standards for 2021, 2025 and 2030. But these are inadequate. Carmakers, oil companies and their political friends across Europe will argue that ETS inclusion eliminates the need for increased vehicle CO2 ambition.

More fundamentally, the ETS is not a good instrument to cut road transport emissions. If the plan is to include transport fuels, the result would be that oil companies have to buy carbon allowances raising fuel prices by €0.06/liter (based on today’s ETS price). Over time that could lead to a 2% decrease in emissions through people changing behaviour. To create real change in the transport sector you’d need a carbon price of hundreds of euros – on top of today’s implicit carbon price (excise duty) of €200/tonne. But since the ETS is a political instrument, the price will always be determined by the weakest link within the system (i.e. the exposed sectors) as well as popular acceptance. As a reminder, the gilets jaunes revolted over tax increases of a few cents. Do we really want to associate the EU Green Deal with higher gasoline and heating fuel prices?

In addition, once a sector is in the EU ETS it also leaves the remit of the EU Climate Action Regulation (the “effort sharing”). Europe’s 2030 climate law is a hugely underappreciated policy achievement and is the single most important reason unwilling national governments – such as my native Belgium or the German government – are considering action in the transport, buildings and agriculture sectors. Including transport in the ETS means national governments lose the main legal driver for them to seriously promote modal shift, tax reform or other green transport policies.

Take fuel taxation: governments can increase or decrease fuel taxes as they please. For example, Belgium levelled the diesel and petrol tax in just a few years to fund lower labour taxes. Germany is imposing a small carbon surcharge on fuel – a compromise, after conservatives failed to secure the transport ETS inclusion at national level. How would these policies fare once transport was included in the ETS?

Finally, the key question facing the climate movement is how we match our fight against “the end of the world” with millions of Europeans struggling to make ends meet? How do we make sure the strongest carry most of the burden? Our answer has always been a fair and effective transition can and should be led by industry. Carmakers, oil companies and big transport companies have the resources, skills and scale to drive the transition. They can undertake multi-billion euro investments, they can absorb some of the costs, they can be patient because their time horizon isn’t the end of the month but years or sometimes decades.

Some of the most problematic elements of the plan could be addressed but it would still remain a distraction. So all in all the inclusion of road transport in the EU ETS remains a high risk, low reward strategy. Because what we really need is a combination of regulation, R&D, investment and mobilisation of finance to decisively steer the transport industry towards zero emissions. This needs to be the focus of the green deal for transport.

Note to the Reader:

But if all of this is true, why then, people ask us, do you support the ETS for aviation and shipping? The answer is  simple. For road we already have implicit carbon taxes of around €200 per tonne (excluding VAT) on diesel and petrol. Then there’s VAT, registration taxes, circulation taxes and national governments can (and do) reform these as they please. For aviation and shipping there is no taxation and national action is harder (though not impossible: for example, ticket taxes or bilateral kerosene taxes). Inclusion in the ETS is not a panacea for these sectors. The same limitations apply, the ETS will not drive technological change which is why we advocate fuel and technology forcing standards – but it is a way to get aviation and shipping to pay a little bit, as today they pay nothing, and to bring them into the EU climate system (and keep them out of the clutches of UN’s agencies IMO and ICAO).