Buildings and road transport pump a lot of emissions into the atmosphere. A new EU policy is looking to change all that but there is a problem that needs to be addressed first.
The European Union imposes carbon pricing on most areas of the economy. If you put carbon into the atmosphere, you have to pay for the privilege to pollute.
This applies to power generators, big industrial sites, shippers and flights that operate between EU airports. But road transport and the building sector are not covered. Not yet anyway.
Currently, the lack of coverage is a massive blindspot for the carbon market, known as the emissions trading system (ETS). Buildings are responsible for more than a third of EU emissions, while road transport pollution remains stubbornly constant.
That is why policymakers have decided to fire up a brand new carbon market that in 2027 will begin pricing pollution from cars and buildings.
Known as the ETS2, this new market will obligate fuel suppliers to pay for their emissions, and will act as a market incentive for building renovations, switching to electric vehicles and other green policies.
Many energy and climate analysts see the ETS2 as crucial to the EU’s chances of meeting its various climate targets, as there are diminishing returns in sectors like power generation.
But there is a problem, as although this new carbon market will not impose charges on end-users like motorists and homeowners, it is inevitable that costs borne by fuel suppliers will be passed on to everyday citizens.
That means there is a big risk that the ETS2 could breed resentment among voters and undermine the very green policies that this new market is supposed to support.
There are fears that it could provoke a repeat of the ‘yellow vests’ gilets jaunes movement that brought French infrastructure to a regular standstill over two years between 2018 and 2020.
Although the ETS2 policy has already been agreed and is set to be implemented in 2027, some governments are already trying to either reform it or even kill it off.
The existing legislation allows for a 12 month delay if energy prices are too high in 2026, in order to make the start of ETS2 as smooth as possible, but more radical changes are also under consideration.
One reform on the table is changing the technical architecture of ETS2 and the number of carbon permits that are put onto the market. Too many means the price will be too low, too few and the cost of permits will increase dramatically.
But another change that some members of the European Parliament are actively pushing for is the so-called frontloading of revenues.
Buying pollution permits will generate billions of euros, which governments will be free to spend on their policy priorities. This idea would allow governments to spend that money before it has actually been collected.
Essentially, granting countries access to a big pot of cash as early as next year would allow them to start spending on building renovations and schemes that promote e-mobility, softening the blow of ETS2 when it is implemented.
That money would be covered by an intermediary like the European Investment Bank with loans, paid back with the proceeds of those revenues.
It is an elegant and creative solution to an issue that has not yet reared its head fully. Implementing frontloading would do something the EU does not do as often as it should: fix problems before they arise.
If nothing is done, then populist forces calling for the ETS2 and other climate policies to be scrapped completely will be bolstered and long-term issues like emissions will not be addressed.
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