Commission planning new self-standing Emissions Trading System for buildings
In the context of the upcoming Fit-for-55 Package, to be published on 14 July, the European Commission is expected to publish a legislative proposal that would expand the Emissions Trading System (ETS) to the transport and buildings sectors. In the past days, EBC managed to obtain a leaked version of the legislative proposal to revise the ETS Directive, which can find attached.
The European Union Emissions Trading Scheme (EU ETS) is a European system designed for cutting greenhouse gas (GHG) emissions. The main feature of the ETS is the 'cap and trade' principle, featuring an emission cap (a ceiling on the maximum amount of emissions) and the trading of EU emission allowances (EUAs). In practice, a cap is set on the total amount of certain greenhouse gases that can be emitted by the installations covered by the system. The cap is reduced over time so that total emissions fall. Within the cap, installations buy or receive emissions allowances, which they can trade with one another as needed. After each year, an installation must surrender enough allowances to cover fully its emissions, otherwise heavy fines are imposed. If an installation reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another installation that is short of allowances. Trading brings flexibility that ensures emissions are cut where it costs least to do so. This idea is also to have a robust carbon price in order to promote investment in innovative, low-carbon technologies.
According to the Commission, the current ETS covers around 40% of the EU's total GHG emissions, coverings emissions from electricity and heat generation, energy-intensive industry and commercial aviation. As a result, more than half of energy-related greenhouse emissions coming from buildings and 30% of the heating sector are already covered by the existing ETS, notably the provision of electricity for use in buildings and most emissions of district heating. However, the Commission considers that many homes are still heated with outdated systems that use polluting fossil fuels such as coal and oil. In this vein, they are aiming for the entirety of emissions coming from the building sector to fall under the ETS. This is expected to increase the burden on fossil fuels used for heating and other uses (e.g. cooking) in buildings.
The leaked draft foresees the introduction of a new ETS for building and road sectors. This will result in a separate standing system as of 2025. This self-standing system will cover new emissions trading for buildings and road transport, with specific provisions for the transition to this system in the previous and following years.
You can find below some initial points of analysis by the EBC Secretariat, based on our current intel, that aims to give a first impression of the potential advantages and disadvantages of the expected measure.
Initial analysis on the extending the EU ETS to buildings
According to the Commission, the current share of the total buildings’ emissions related to heating covered by the EU ETS is around 30%.
The extension of the ETS to “buildings in full”, should cover all heating and cooling related GHG emissions – in practice covering fossil fuels for heating.
This is a measure that could prove politically costly to implement, with Member States prone to attempt to water it down in the Council. Nevertheless, it looks like the Commission is determined to move forward with it.
It is a reform that will not impact construction SMEs immediately, but can rather have some side-effects of relevance.
With energy prices expected to rise for the end consumers (who will probably absorb the entirety of the costs), horizontally affecting all economic profiles, this is a measure embedding high political risk (indicatively, the European Parliament’s Environment Committee Chair MEP Pascal Canfin called the planned measure “politically suicidal”).
Price increases for fuels are expected to rise in some cases up to 30% compared to today, according to estimates of the European consumers’ association BEUC.
The leaked draft contains no mention of a dedicated corrective Climate Social Facility fund, as previously advertised by the Commission’s Executive Vice President Frans Timmermans – although it is possible that is will be announced as part a separate policy. Such a fund is expected to alleviate the consequences of imposing ETS for poorest citizens, who would suffer the most from this horizontal increase in the costs of fuels.
More financial burdens to homeowners could actually have a reverse effect: instead of incentivizing energy renovation, it could mean the further impoverishing of some homeowners, who would opt to stick with their old infrastructure/appliances as a result.
Homeowners/tenants will seek more energy-efficient buildings, thus boosting demand for energy efficiency renovation of buildings, to avoid paying inflated energy bills. This might lead to tenants being more favorable to renovation works, as they could see a real monetary incentive in it.
A future uniform ETS could guarantee policy coherence and fewer regulatory burdens for the building sector – not the case with the current proposal though (which e.g., intends to keep both the new ETS and the existing Effort Sharing Regulation (ESR)).
Given the current context described, the EBC Secretariat would like to emphasize the need for a thorough impact assessment by the European Commission before taking any action, in order to understand the impact that extending the ETS to buildings and transport will have on European citizens and construction SMEs in particular.
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