More tax for less Co²: The EU-ETS extension’s weaknesses

As the much anticipated Green New Deal draft paper was released late last year, the Commission plans to extend its European Union Emission Trading Scheme (EU ETS) to Shipping, Aviation and Road Transport. So far, the system covers economic sectors amounting to 45 % of the EU’s total Green House Gases (GHGs) emission. Presented as the cornerstone of the EU’s policy to combat climate change, the EU ETS doesn’t escape criticism from Environment NGOs.

Launched in 2005, the EU ETS is a market where grants authorising companies to emit “pollution allowances” worth 1 tonne of Co² are traded. Every year, companies are allocated those pollution grants and receive a threshold of Co² emission they can’t overpass. If they do, businesses can buy allowances in the market to cover excess emissions or face fines; It is therefore Demand and Supply that sets the price for Carbon emission.

So far, the “cap and trade system”, the other name of the EU ETS remains the main driver of EU policy to reach the Green New Deal’s 55% Co² emission reduction target by 2030. Its reputation of market-driven tool even turned it into a model for countries including China which launched its own emission trading system in 2017.

But behind what seems to have become a successful way to fight climate change, the disappointments were numerous, especially during the early implementation phase. The price of Carbon, set at around 20 euros when trades were launched, plummeted to 0 in 2007 before finally reaching -and maintaining- to a desperately low 25 euros lately. Yet, whereas the Commission welcomes the recovery, the current price hardly encourages the most polluting companies to invest genuinely in new low emission technologies as costs in Research & Development way overpass the one for allowances.

Moreover, Brussels-based NGO Transport & Environment (T&E) highly doubts the system would be sufficient and fears that using solely price to regulate all CO² emissions can lead to negative externalities.

Taxing even more Road Transport would be counter-productive

The extension of the EU ETS to Road Transport which amounts to 75% of Co² emission of transport activities seems at first glance to be appropriate. But quite paradoxically a collection of environment NGOs including Transport & Environment, The European Consumer Organisation, Climate Action Network, Friends of the Earth Europe or even WWF urge the Commission to reject the idea of extending the Emission Trading System to road transport while William Todts from T&E calls it a “distraction at best”.

The groups claim that petrol and diesel are already heavily taxed by Member States and the impact of the EU ETS on price would be marginal (0,06 cents per liter). They also suggest the burden would be supported mainly by poorer individuals relying heavily on personal vehicles. Precisely, making the most vulnerable populations shoulder the burden of the greening of the economy is contrary to the spirit of the Green New Deal which Just Transition Fund aims specifically not to let any country or individuals on the side of the road.

No alternative technologies in Maritime transport

In spite of the many weaknesses of the EU ETS, the pledge of Commission President Von der Leyen to extend the market to cover Maritime transport and international flights was still generally welcomed.

Maritime Greenhouse Gases emission is indeed on the rise in Europe and one of its company, well known for its cruises in the Mediterranean (MSC) has even reached the top 10 list of EU Carbon emitters according to a late T&E report. MSC just overpassed a German Coal Plant and the airline Ryanair, emitting 10 MT of Co² alone per year.

So far, the shipping industry is excluded from any system of CO² emission sanction and its actors fail to find an agreement to reduce their contribution to the Climate Crisis: The International Maritime Organisation couldn’t reach a compromise on short term measures including reducing vessel speed in a bid to decrease Co² emission by 24 %. Far from being sufficient to reach the Paris Agreements goals, this measure and its adoption failure highlight the difficulty to shift away from fossil fuels whereas no efficient technology can suitably be used in replacement for this sector yet.

The EU ETS is no miracle solution, but it can help the sector becoming liable regarding the issue: “To make shipping do its fair share, Europe must bring shipping into its carbon market and mandate CO2 standards for all ships calling at its ports” according to Faig Abbanov, shipping policy manager at T&E.

Double-taxing air carriers ?

Modern technologies are not yet conclusive for aviation either, although it is one of the fastest-growing source of Greenhouse Gas emission in the world. Currently, EU domestic flights are already part of the EU ETS but the Commission plans to extend the system to any flights to and from EU airports in 2024.

So far, the EU ETS implementation has been postponed as the International Civil Aviation Organisation (ICAO) implemented its own Carbon market system called the Carbon Offsetting and Reduction Scheme for International Aviation. In this Scheme, Carriers must purchase emission units from green projects (Such as reforestation) to compensate their contribution to Climate Change. The end goal is precisely not to reduce the sector’s GHGs emission but to maintain the 2020 pollution levels onwards. As T&E pointed out, the relative greening of the aviation sector so far hampers a shift to an ambitious system of the like of the EU ETS. Still, even if the EU ETS is effectively expanded to international flight, the question remains whether this will lead to double taxation for air carriers.

Overall, the EU ETS remains far from being sufficient to provoke a fast pace greening of production methods. Expanding it to new sectors has its pros and cons: While it shows the voluntarism of the Commission, it could also backfire quickly if not proceeded with caution.

The high risk low reward expansion to Road transport seems unanimously rejected by practitioners and the expansion to Maritime transport will certainly not cause a revolution while the plan to extend it to the whole aviation sector might never see the light of day and would thus cause the Paris agreement targets to be scrapped.

Simply punishing “wrong-doers” therefore doesn’t seem like a miracle solution. Perhaps, policymakers could combine the polluter-pay principle with pro-competitiveness nudges instead. They could for instance set an ambitious infrastructure installation plan enabling logistic business players to switch to alternative energies thanks to wide-spread recharging stations.

Rémi Penet is a master student at the Institute for European Studies of ULB.