The EU Emissions Trading System for buildings: a help or a hindrance?

The European Commission has announced proposals to expand the EU emission trading system for fuel use in buildings and transport. How is the scheme designed to work, what is the impact on consumers, and will it really help the decarbonisation of the EU’s building stock?

In July 2021, the EU announced proposals to expand the Emissions Trading System (ETS) into fuel use in buildings from 2026 onwards. The relative success of the current ETS has had notable impacts on emissions from power and heat generation and energy-intensive industrial installations. Since 2005, emissions from entities under the scheme have been cut by 43%.[1] But can positive effects be gained from expanding the system to fuel use in buildings and transport?

Why focus on road transport and buildings?

‘Building and road transport are responsible for 30% of total GHG emissions and more than half of emission under the Effort Sharing Regulation’ explains Helena Fabra, Policy Officer at DG CLIMA of the European Commission. ‘Rather than decreasing as you might expect, between 2014 and 2019, building emissions increased by 2%, and transport by 7%.’

Helena explains the integral role the ETS expansion plays in the Green Deal and Fit-for-55 packages. ‘Under European Climate Law, there are legally binding environmental objectives. These are to achieve climate neutrality by 2050 and a 55% net GHG emissions reduction by 2030 compared to 1990. The proposal is for the upcoming ETS for buildings and transport be separate systems. These systems would be focussed ‘upstream’: on the fuel suppliers rather than end consumers. Although the EU-wide carbon pricing is a cost-effective tool, it cannot address all barriers. This means we need other complementary policies together with emission trading. There will be strong links to the new Social Climate Fund, designed to address any social impacts from the proposed ETS on vulnerable groups in the EU.’

The role of redistribution and the road to reduction

Many companies are already seeing business opportunities associated with lower carbon projects. To accelerate the rate of adoption, transparent and consistent measurement, direct support mechanisms, and a few carrots next to the ETS ‘stick’ are needed. The funds that authorities gain through the auctioning of ETS allowances should be redistributed. This is not only to help the most vulnerable, but also to drive innovation and change. If there is no redistribution, the EU risks becoming less competitive than other world regions.

Finally, Justyna Chmielewska, Associate Director and Head of Sustainability at Gleeds Polska, made a great comparison between losing weight and reducing carbon. ‘You want to get to this situation of feeling healthy, so you get a plan, set a target and get started. In short, there are three steps for buildings to become ‘fit’: becoming aware of good habits, undertaking new activities, and making a cost sacrifice. The ETS is part of the necessary cost sacrifice towards carbon neutrality.’

Defining success in going zero and sending the right market signals

One listener pointed out that currently, we are lacking clear and agreed upon definitions of ‘zero carbon’ and ‘climate neutrality’. That said, the current proposal for a new, separate, ETS for buildings can have a positive impact on decarbonising the EU’s building stock. For the ETS to have an impact, it needs to be viewed holistically with other relevant legislation and initiatives, and the pricing will need to be right. It is not a silver bullet, but it undoubtedly has the potential to deliver a clear and needed signal to the market.

[1] https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3542