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The EU must fix its current Emissions Trading System (ETS) before it embarks on the second phase focusing on buildings, writes Elisa Martellucci. This eventual ETS2 must be built, with close stakeholder involvement, on fair and equitable foundations.

Anna is a young trainee at the European Commission. She arrived in Brussels and looked for an apartment to rent close to the EU headquarters. She got lucky and found a nice flat to share with two other interns. However, the apartment had not been renovated for over 20 years. The windows were single glazed and an old oil boiler heated the building.

Anna’s contract at the European Commission was extended. She decided to stay in the same apartment because she got along well with her two flatmates. Due to their high energy bills, the three tenants asked the owner if it would be possible to install double glazing in some of the rooms. Despite financial support initiatives launched by  Brussels Environment, their landlord refused the request because he considered the work troublesome and costly. 

Three-quarters of the EU’s building stock is energy inefficient. Collectively, buildings in the EU are responsible for 40% of our energy consumption and 36% of greenhouse gas emissions. Improving energy efficiency in buildings, therefore, has a key role to play in achieving carbon-neutrality by 2050, as set out in the European Green Deal.

However, as Anna’s story reveals, diverging incentives between tenants and proprietors, as well as the difficulties involved in planning refurbishments, are among the top barriers to building renovation

Bricks and carbon

‘Fit for 55‘, the European Commission’s roadmap for achieving 55% emissions reductions by 2030, now includes the establishment of a new self-standing emissions trading system for buildings and road transport from 2025, also dubbed “ETS2” to distinguish it from the current ETS covering the power sector and energy-intensive industries. Together with the policy measures already in place, the new system is supposed to provide the right price signal to  speed up emissions reductions in these two sectors.

As these sectors are characterised by small and distributed emission points, such as individual houses and cars, ETS2 will apply to energy suppliers rather than consumers. 

To address the social repercussions of this extension of emissions trading, the Commission proposes to establish a Social Climate Fund.

Beyond the negative impact that the new system might have on heating prices and consumers, carbon pricing alone might not create the right incentives to reduce building emissions through renovation because renovation is held back by barriers at different points throughout the value chain. 

In addition to the divergent incentives mentioned earlier,  these include a lack of trust in the actual energy savings renovations will achieve, according to the Open Public Consultation on the Renovation Wave. 

Building a fair system

This means that introducing carbon pricing in the buildings sector only makes sense if it goes hand in hand with strengthening complementary policies and measures to remove non-market barriers to decarbonise the buildings sector. In addition, the revenues generated from carbon pricing schemes need to support investments towards cleaner, more efficient alternatives.

This is especially the case for lower income households who risk being hit hardest by higher energy prices while lacking the resources to invest in cleaner alternatives. Even with subsidies available, not everyone can access them to renovate their homes and those subsidies do not cover all the costs, so some people will inevitably fall through the cracks.

Ultimately, all sectors have to pay their fair share for the pollution they cause. The ETS2 aims primarily to make fossil fuel suppliers pay, even if the price will effectively be passed on to individual consumers, many of whom may be plunged into energy poverty.

Avoiding this and ensuring that ETS2 achieves its environmental and social goals requires close stakeholder engagement and involvement. Towards that end, Carbon Market Watch is involved in Emissions Trading Xtra (ETX), a project supported by the EU’s Life programme that seeks enhance governance around the ETS and harness people power for effective climate action.

For ETS2 to be fair,  heavy industry must not be able to continue polluting for free as occurs under the current ETS with its free allowances.  There is clearly a lot of work left to make the ETS effective to decarbonise energy-intensive sectors like steel, cement and chemicals. Let’s fix that first.

A new ETS system should not distract from the task of creating a better pollution price signal for the sectors already covered by the ETS. Nor can it be a reason to weaken measures to save energy in the buildings sector, or aggravate social inequity and energy poverty. A fair and effective ETS2 is possible but only if it is constructed on sound foundations.