ETS2
The EU’s new carbon tax on fuel (ETS2) is a €300bn opportunity to help transition European citizens away from fossil fuels and imported oil
The EU’s new carbon tax on fuel (ETS2) is a €300bn opportunity to help transition European citizens away from fossil fuels and imported oil
In 2027, Europe will introduce a new emissions trading system, the so-called ETS2, that will levy a carbon price on diesel, petrol and heating fuels. ETS2 is a €300 billion opportunity to liberate Europeans of expensive oil imports and reduce pollution from vehicles. The social concerns are real but can be easily addressed by redistributing part of money, and using the rest to invest in electric mobility and shared transport.
At a price of €55 per tonne of CO2, the new ETS would add around €7 to the price of filling up a car (VW Polo). Yet, even with an ETS price of €55 per tonne, petrol prices would remain below the average of the last 20 years when adjusted for inflation.
But as the ETS2 price will be levied equally and regardless of income - both between and within member states - there is concern that the new levy could disproportionately affect low-income drivers.
Here’s how to avoid this…..
The biggest challenge for countries is the wise spending of their ETS2 revenues. Without revenue redistribution, the ETS2 will be seen to be regressive and potentially politically unpopular.
T&E recommends returning between 50% and 75% of what people pay as financial compensation.
There are several ways of doing this:
Targeted compensation that only hands out cheques to low and (lower) middle income households, while higher earners don’t receive rebates.
Targeted support comes with administrative challenges. Instead governments could provide every citizen with a climate dividend, regardless of income. This requires more of the revenues, though, as rebates need to be high enough to be both visible and effective. When opting for population-wide cheques, T&E recommends returning around 75% of what people pay as income support.
ETS2 revenues could also be used to lower other taxes such as electricity charges or labour taxes, although this tends to benefit middle-income households more.
In terms of investments, T&E recommends spending around half of the budget available on the transport sector.
Specific measures to help people who have to rely on cars should be rolled out, such as low-cost EV leasing, which has been successfully done in France. Beyond that, key social transport measures that could help sustainable and affordable mobility could include:
Subsidies or leasing schemes for (e-)bikes or upgrading of cycling infrastructure;
Measures aimed to improve public transport in rural and suburban areas;
Shared mobility services such as public bike, e-scooter and car sharing;
Mobility credits and scrappage schemes which provide targeted financial support to replace polluting cars with active, shared and public transport or - where necessary - cleaner vehicles;
Targeted roll-out of charging infrastructure for electric vehicles, especially among citizens who are unable or cannot afford to install charge points at home (e.g. through land use planning, public procurement or public investments).
Targeted schemes should prioritise small enterprises operating in rural, low-income or industrial regions where the economic case for electrification is often harder to make in investing in clean transport and energy solutions.
While financial compensation paid from ETS2 revenues should always be used as the first response to high CO2 prices, one of the challenges of the ETS2 is that price levels are not set or known in advance, but instead depend on the variable price of the carbon market.
To avoid sudden large price shocks, countries could adjust their national taxes when ETS2 prices deviate from what they had planned for. This would lead to the introduction of a national price corridor, with a floor and a ceiling price.
This would come down to the introduction of a national price corridor with a floor and ceiling price. For example, 25 Member States already levy excise duties beyond the minimal level required by the EU. This could be temporarily lowered or increased to counterbalance ETS2 prices.
If a member state opts to lower national taxes - in essence setting a national ETS2 maximum price - it should also introduce a minimum price to ensure that when ETS2 prices go down again, national taxes are reinstated. It is worth noting that market prices will mainly be driven by the ability of countries with large ETS2 emissions, such as Germany, France and Italy to reduce their emissions.
Neutralising the ETS2 price effect in these countries could lead to an overall allowances shortage for the entire EU-market - leading to higher prices for the entire EU-27. For this reason, these countries are the best candidates for national taxes serving as the back stop for that.
In emissions trading, the carbon price can fluctuate widely. Since these prices cannot be capped at national level, T&E calls for reforms to the EU’s Market Stability Reserve to keep prices at a maximum of close to €55 per tonne of CO2.
ETS2 prices will only be high if other policies, such as the EU-level vehicle CO2 standards, national-level measures, or zero-emission zones are delayed or fail to deliver. The Commission should increase pressure on countries to incorporate new national policies into their National Energy and Climate Plans (NECPS). The Commission should swiftly act on the following:
Propose the announced Greening Corporate Fleets legislation and introduce electrification targets for large fleets, as they offer immense potential to reduce emissions and therefore keep ETS2 prices down;
Launch an EU Platform for low-cost EV leasing to support member states in setting up national social leasing policies.
Maintain 2030 and 2035 car CO2 targets. Weakening of the 2025 car CO2 targets will exert upward pressure on ETS2 prices meaning it is crucial to retain the 2030-35 car CO2 targets to prevent further price increases in ETS2.
