New Study Suggests That The EU Carbon Market Won’t Cut Pollution — Including Road Transport

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A new study by Cambridge Econometrics found that the EU’s requirement for oil companies to buy EU pollution permits for diesel and petrol sold to motorists really won’t make a difference in regards to significant emissions reductions.

Currently, the power sector and heavy industry need to buy carbon credits in the EU emissions trading system (ETS). The European Commission’s plan to add cars and trucks is supposed to shift the burden of emission reductions from the road transport sector to heavy industry and power. That’s great for them, but the environment doesn’t really benefit from this according to the study.

Quick Background

The European Commission says that it’s EU ETS is the “cornerstone of the EU’s policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively.” The goal is simply to cap the number of allowances issued every year and have that cap decline year over year — reducing the total emissions allowed over time. The EU ETS currently covers:

• Power and heat generation
• Energy-intensive industries
• Intra-EU aviation (expires December 2023)
• Emissions of CO2, nitrous oxide (N2), and perfluorocarbons (PFCs)

Once elected as the president of the European Commission, Ursula von der Leyen detailed her desire to expand the coverage of EU ETS to including aviation-completely, shipping, and possibly road transport and construction. The European Green Deal also stated that “it will consider applying European emissions trading to road transport.” The goal of the study was to explore the potential impacts of an extended ETS and used different types of analysis, including E3ME and the application of a macroeconomic model.

Quick Glance At The Study

Emissions Reductions Scenarios

The study created scenarios with a mix of official policy and the PRIMES 2016 Reference scenario. Researchers targeted a 43% reduction in ETS emissions in 2030 which is in line with the 2030 climate and energy framework — compared to 2005 levels. Also, there was a targeted 63% reduction in ETS sectors in 2050. The scenarios all use the same ETS emissions reduction target, with the major difference being the scope of that ETS. A higher ETS price will be needed along with an additional supporting policy for a more stringent 2030 and 2050 emissions target.

Baseline Projections With 2 Scenarios

Scenario 1: In the first scenario, a linked carbon price is introduced into the road and transport building sectors. This was to understand the impact that a carbon price could have on this sector.

Scenario 2: In the second scenario, an extended EU ETS that includes the road and transport sectors as well as the building sectors is added.

In both scenarios, the researchers expect there to be higher government revenues. The first scenario introduced a new source of revenue while the second scenario expanded the ETS to new sectors that would result in new revenue being created through allowances issued at higher prices than that of the baseline. In the analysis, researchers considered three potential options:

1. A central case. This is where all revenues are recycled through tax reductions that are equally split between income tax, employers’ social security contributions, and VAT.
2. A low carbon investment variant. This would divert 10% of the revenues away from tax cuts — 9% for energy savings and 1% for direct subsidies of low-carbon technologies. The remaining 90% is used for tax cuts as in the central case.
3. A debt paydown option. 90% of the funds will still be used for tax cuts, but 10% will be held onto by governments and used to reduce government debt levels.

The E3ME Model

The E3ME is a computer model of the world’s economic and energy systems, along with the environment to an extent. In this part of the analysis, researchers used a combination of E3ME results and evidence from literature on the responsiveness of households to change in fuel prices. This is to assess potential impacts on households.

The analysis focused on 2030 since this is when the distributional effects are likely to be most pronounced.

In regards to road transport, the study showed that there are unlikely to be large volumes of second-hand EVs available to purchase for low-income households. The price-competitiveness of low-carbon heating and transport technologies will still be evolving. This means that not all low-income households that need to upgrade by 2030 will choose the low-carbon option — they simply won’t be able to afford it.

Environmental Impacts

The study showed that by 2050, the levels of emissions are projected to be above 550MtCO2 in road transport and 400MtCO2 in buildings. The impacts of applying a linked carbon price in the transport and building sectors would make technologies with high emissions factors more expensive. This would create more incentives for consumers to switch to low-carbon technologies.

The additional reduction in transport compared to the baseline is small but in the buildings sector, it is expected to have a more substantial response — still below the emissions reductions delivered by this price in current ETS sectors. Regarding overall emissions reductions, both sectors are projected to lag behind current ETS sectors, with just over 40% and 50% reductions from 2005 levels by 2050.

Socioeconomic Impacts

The study assumed that revenues collected from the linked carbon price or ETS are re-used by the government, which impacts the total GTP in a positive manner in both scenarios relative to a “do nothing” baseline. Regarding employment, the impacts mirror GDP impacts in both scenarios. The differences in employment are a bit smaller due to positive wage adjustments in response to higher output.

In the second scenario, the extended ETS scenario, the employment impact for power generation is strong and larger than for this sector’s output. This could be due to changes in the generation mix as a response to high demand for electricity along with a high ETS price in this scenario. Renewables are more labor-intensive than fossil fuels, so there is a strong increase in demand for labor in association with their take-up over time.

Final Notes

This is just a quick glance at the study, which you can look over for yourself. Emissions reductions need to happen and are a requirement of an extended ETS. However, the impact that this policy could have on existing ETS sectors could lead to lower output and employment in existing ETS sectors. The lowest-income households will be financially constrained and could find it almost impossible to adopt low-carbon technologies until they drop further.

Extending the ETS alone isn’t going to deliver the emissions reductions that are required of road transport and buildings. The analysis showed that there is no scope for relaxing existing policies. An expanded ETS would require more support to deliver the required savings and must consider sector-specific challenges such as:

• Slow rate of fleet renewal.
• Challenges that this causes to low-income consumers.

The ETS does have a huge role in other sectors, such as the electricity sector. It pushed decarbonization in this sector. Achieving a low-carbon electricity sector is the only way to decarbonize transport and buildings, so the researchers noted that the ETS should continue its role in this sector.