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Extending EU Emissions Trading System to buildings and transport will require measures to protect the most vulnerable consumers, says report co-authored by Professor Michael Pollitt of Cambridge Judge Business School.

European union flag in vibrant green environment.
Michael Pollitt.

Proposals to extend the EU Emission Trading System (ETS) to cover building and transport emissions would help Europe achieve its climate goals, but policymakers must protect the most vulnerable consumers who would face proportionately higher costs for road transport and heating fuel, says a report co-authored by Professor Michael Pollitt of Cambridge Judge Business School.

The EU ETS is part of the EU’s effort to reduce EU-wide emissions (compared to 1990 levels), and to achieve no net emissions of greenhouse gases by 2050. These goals were reinforced by the European Green Deal adopted by the EU Commission in December 2019.

The report prepared for the think-tank CERRE, the Brussels-based Centre on Regulation in Europe, says it raises a “red flag” to policymakers on the need to address the distributional effects of any extension of EU ETS – which now applies to electricity and certain other energy intensive industries such as steel making and cement – to also cover the direct combustion of fossil fuels in the heating of buildings, as well as in transportation.

Potential policy options to mitigate distributional effects include adjusting existing fuel taxes, or targeted use of revenue from additional permit sales under EU ETS to support poorer consumers who might be adversely affected.

“Overall, we conclude that extending the EU ETS to buildings and transport, if done in a way that does not undermine existing standards, adequately mitigates potentially severe distributional effects and is consistent with the 2050 net zero target, would be a substantial contribution to the achievement Europe’s climate goals,” the report says.

The report – entitled Feasibility and Impacts of EU ETS Scope Extension (Road transport and buildings) – is co-authored by Michael Pollitt, Professor of Business Economics at Cambridge Judge Business School, and Dr Geoffroy Dolphin, research associate of the Energy Policy Research Group (EPRG) at the University of Cambridge.

Proposals to extend EU ETS to buildings and transport followed revised emission reduction targets for 2030 of 55% compared to 1990 levels as part of the European Climate Target Plan. Achieving these additional emission targets will require a strengthening of existing EU and national climate policy instruments. The current proposal to extend the EU ETS to cover emissions from heating buildings and transport emissions would nearly double the coverage of the EU ETS to around 80% of greenhouse gas emissions in the EU, the report says.

“Europe already has specific policies in place for the transport and buildings sectors”, says report co-author Professor Michael Pollitt. “The extension of the EU ETS to road transport and heating fuels should be paired with existing policies that are complementary and have the advantage of targeting local externalities, promoting learning benefits, and overcoming buyer myopia in the purchasing of energy consuming equipment. This is not an either/or debate where policy makers must pick between an EU ETS extension and a tightening of current CO2 standards regulation.”