ETS2 is about to launch, increasingly resembling a carbon tax that will directly impact European citizens' wallets.
A new EU CO2 market will complement the existing Emissions Trading System (ETS), extending to road transport and residential and industrial heating emissions. From January 2025, the EU will introduce "ETS 2," a greenhouse gas emissions trading system as part of its "Fit for 55" package. This new system will operate alongside the existing ETS but will directly affect citizens, leading to significant increases in fuel prices at the pump and gas bills for heating.
Although officially called "Emission Trading Scheme 2," many perceive it as a "European Carbon Tax." With the pretext of environmental action, the EU seems to have found a way to circumvent treaty constraints meant to protect the fiscal sovereignty of its Member States.
Timeline and Requirements: By January 2025, all parties involved must secure authorization to supply solid, liquid, and gaseous fuels. By April 30, 2025, obligated parties must submit verified emissions reports for the previous year. Starting in 2027, they will also need to surrender emission permits corresponding to each verified ton of CO2.
Key Differences with Traditional ETS: Emission permits in ETS2 will be auctioned exclusively, and ETS2 permits (EUA2) will not be interchangeable with ETS1 permits (EUA). This distinction means that a separate price will develop for ETS2, and operators will be unable to use permits from ETS1.
The EU initially suggested that ETS2 would add around €0.10 per liter to gasoline and diesel prices. However, fuel producers and industry analysts estimate an impact between €0.50 and €0.80 per liter by 2030, with emission permit prices potentially surpassing €200 per ton of CO2.
In 2018, the Gilet Jaunes movement in France protested against a fuel price increase of just €0.03 to €0.065 per liter, leading to the suspension of a national carbon tax. What could happen across Europe with a policy that is ten times more impactful? Including residential heating will disproportionately burden low-income households, especially those in rural areas or in countries like those in Eastern Europe, where energy sources are less favorable, such as LPG, diesel, or coal.
Auction Management and Revenue Allocation: Auctions will be managed by each Member State, with proceeds going to EU-administered funds: the Climate Social Fund and the Modernization and Innovation Fund, as well as to infrastructure incentives for electric mobility and compensation for vulnerable sectors.
This auction-based mechanism for emission permits is also becoming the norm in ETS1, where EUA permits are increasingly distributed through auctions instead of being allocated for free. This shift has gradually transformed the original principle of ETS, making it resemble a carbon tax. In the ETS framework, one company's costs should ideally be another's revenue, encouraging cost-effective decarbonization in a technology-neutral way. However, when auction proceeds are distributed beyond this framework, resources are often spent inefficiently, burdening companies that then pass these costs down the chain.
Current Trends: The EUA DEC24 forward contract price has fallen from €87 in October 2023 to €59.98 as of October 8. This decline is mainly attributed to reduced industrial production in Europe, particularly in Germany, and record renewable energy output in 2024 due to increased rainfall. Nonetheless, both ETS1 and ETS2 have automatic supply adjustment mechanisms (Market Stability Reserve) that reduce the introduction of emission permits in response to declining demand, thereby stabilizing prices.
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