Key lawmakers admit new EU system could raise petrol, gas prices higher than expected

The EU’s new carbon pricing scheme for road and heating fuels (ETS2) – due to be introduced across the bloc in 2027 – could lead to higher price rises than originally thought, key lawmakers have told Euractiv.

From 2027, the EU will start pricing CO2 emissions from buildings and road transport using a new carbon pricing system known as Emissions Trading System 2 (ETS2).

When the scheme was approved in 2023, EU lawmakers promised that prices would remain below €45 per tonne of CO2, a mark-up of around 10 cents per liter of diesel or petrol.

Peter Liese (CDU/EPP), who was the European Parliament’s chief negotiator on the matter, told Euractiv that he was “a bit more pessimistic now” that the €45 limit could be maintained “because we are experiencing setbacks in terms of mobility. and buildings.”

As ETS2 is market-based, if Europe is less successful in phasing out its dependence on CO2-intensive energy sources, the demand for CO2 emission certificates will increase and the price of carbon will jump accordingly. However, Liese added that “it is our joint task to avoid this scenario”.

Emissions from buildings, mostly caused by heating systems, and road transport, mostly caused by cars and trucks, are currently falling more slowly than the European Commission’s forecast.

Additional laws to reduce emissions in these sectors – such as the EU Buildings Directive or the German law banning new gas and oil boilers (the Heating Act) – have meanwhile been substantially weakened or will come into full force later, such as the de facto phase-out of internal combustion engines until 2035.

This development could lead to a higher demand for emission allowances in 2027 and thus a higher carbon price.

The heating regulation caused resistance

The situation in his native Germany concerns Lies in particular: “Last spring, many people were still determined to install climate-neutral heating systems,” he said, adding, “the debate about the heating law caused a setback.”

In 2023, Germans installed 790,000 new gas boilers – more than in any of the previous 20 years. Many say the surge was due to an eleventh-hour panic, with homeowners scrambling to install new gas boilers before the upcoming rules ban them.

When it comes to transport emissions, Liese says German Transport Minister Volker Wissing (FDP/Renew) is “not really doing anything” – pointing to declining sales of electric vehicles (12.2% of all new vehicles in April 2024 versus 14.7% in April 2023).

Germany’s failure to meet its climate targets in these two sectors means that “the pressure on certificates is then greater and prices are rising,” according to Lies.

€45 ceiling “very soft brake”

Other lawmakers share concerns that prices will exceed 45 euros.

“€45 is not a hard limit in the current proposal, but rather a very soft brake,” Tiemo Wölken, a German MEP and environmental policy coordinator for the center-left S&D group, told Euractiv.

“Current Studies […] let’s assume the price could go up to €200 per ton,” he said, pointing to research by German think tank Agora Energiewende.

To avoid “social imbalances”, more money is needed for the EU’s 87 billion euro social climate fund to cushion the impact of new carbon prices on the poorest, Wölken said.

“It is good to see that Mr. Liese is now aware of what we have already pointed out in the ETS negotiations,” he added.

What lessons to learn?

In April last year, Liese said there was a “relatively high” probability that prices would remain below €45 – and Wölken’s colleague Mohammed Chahim (PvdA/S&D) also noted that “there is no longer any need to assume a price increase. for households”.

While similar comments were made at the time by Greens negotiator Michael Bloss, he has now told Euractiv that “it is increasingly likely that costs could rise above €45 due to CDU blocking of other legislation”.

Bloss admitted that such a price increase would jeopardize the success of the scheme “because it is clear in the EU that a very high price is not politically feasible in southern Europe”.

For Lies, however, the lesson from the German heating law – and the backlash it has caused – is fundamentally different.

“I actually thought we learned from the heating bill that a regulatory bill doesn’t lead to a better outcome than a market economy,” he said, accusing the Greens of still having too much faith in prescriptive regulation – and the Social Democrats that “… fluctuations ” in their support for ETS2.

Instead, more targeted support is needed to support low-income households in transitioning to climate-neutral alternatives, he said: “Social problems exist mainly for those earning below the average”.

“Releasing ETS2 will not solve a single problem. Then additional measures would have to be taken to reduce emissions,” Liese said, adding that those measures “may be more expensive and may meet with more resistance.”

[Edited by Donagh Cagney/Anna Brunetti]

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