National emissions cap for the ESR sectors. Elaboration of policy instruments providing safeguards for climate targets

A national emissions cap for the sectors under the Effort Sharing Regulation (ESR) (built environment, mobility, small industry and agriculture) is one of the proposals contained in the March 2023 Interdepartmental Policy Research (IBO) Climate Report. In this study, we examine how this policy instrument can be introduced as an effective safeguard mechanism for national emission reduction targets.

We detailed three variants of an ESR cap. A cross-sector cap and trade system would encourage emission reductions through the most cost-effective measures. Sector-based partial caps provide more opportunities for adjustment by sector, but are less cost-effective and implementation is more complex.

An emissions charge with dispensation rights is a variant that, unlike the other variants, does not specify the maximum allowable emissions, but rather the emissions on which no emissions charge is payable, much like the current CO2 tax for industry. As a result, the effect of the safeguard mechanism is lower than in variants 1 and 2.

The study further elaborates the design choices, interaction with other policy instruments, implementation and impact on emission reduction and the burden. The main considerations in the design of an ESR cap are those of the certainty of a maximum price versus the safeguarding of climate targets, efficient emission reduction versus steering by sectors, and whether to allocate allowances via auction or via free allocation. The balancing of the various interests will require political choices.