19 Dec 22

EU approves CO2 tax on transport

From 2027, the EU will tax carbon emissions from transport and heating. That was agreed by the European Parliament (EP) on Sunday morning. The controversial measure will be softened by a temporary price ceiling, and a new, €87-billion social climate fund.

Following marathon talks that started on Friday, the EP agreed to reform the EU’s Emissions Trading Scheme. ETS is the biggest carbon trading market in the world, and a key element of the EU’s climate policy, which aims for a climate-neutral economy by 2050.

ETS2 in 2027

The result, dubbed ETS2, for the first time includes a price on the carbon emissions from fossil fuels used in road transport and the heating of buildings. The measure is set to come into effect in 2027. 

What will be the practical implications of ETS2?

  • Fossil fuel prices will go up, with up to 10.5 eurocents per litre for petrol, and 12 eurocents per litre for diesel, according to a study by the Potsdam Institute for Climate Research.
  • The price for heating fuels (gas, heating oil, coal) will also go up. 
  • The deal now also includes “process heat” from industrial activities and office heating, meaning it is now even bigger than originally envisioned by the European Commission.
  • Some sectors remain exempt from the extra carbon tax: agriculture and fisheries, because they are “sensitive” industries, and diesel trains, because they are “out of scope” of ETS2.

Negotiations for ETS2 dragged on because the measures are controversial. Carbon-taxing transport and heating could be perceived as invasive and excessive; some fear it could trigger an EU-wide protest movement similar to the violent and persistent gilets jaunes (‘yellow-vest’) protests in France, also following fuel tax increases. 

Soften the blow

Three measures are designed to soften the blow of the new tax (which the EP insists “isn’t a tax”):

  • A new Social Climate Fund will shield EU households and SMEs from the worst effects of rising fuel prices, for instance by offering insulation vouchers or subsidizing greener transport options. The Fund’s €87 billion will be financed by the revenues of ETS2. 
  • A price ceiling of €45 per tonne of carbon emitted by transport and heating will apply until at least 2030.
  • If energy prices remain “exceptionally high”, as they have done since the start of the Ukraine War, ETS2 could be delayed by a year, until 2028. 

The deal still needs to be approved by EU member states and the EP itself, which will vote on the proposal early next year. 

Image: Shutterstock

Authored by: Frank Jacobs