National ETS for buildings and transport. Elaboration

The European Commission has proposed introducing a separate EU-wide Emissions Trading System (ETS) for the built environment and transport, setting an EU cap on these sectors’ CO2 emissions. This will have the advantage of the cheapest measures being implemented first. A European ETS also has its drawbacks, though, in particular that the Netherlands and other countries with high-quality buildings and cars will for the time being have no incentive to take action. This could be tackled by rolling out a national ETS, as Germany did in early 2021, which could serve as an example for the Netherlands.

A national Dutch ETS would be a cap-and-trade system in which the government sets a cap on the total amount of greenhouse gases that may be emitted each year. An ETS for the built environment and transport would encompass the CO2-eq. emissions arising from the use of transport motor fuels (petrol, diesel, LPG, hydrogen) and energy (particularly natural gas) used for space heating in dwellings and other buildings. For these sectors it makes most sense to opt for an ETS implemented at the level of energy and fuel suppliers (upstream approach). These actors would then have to be issued sufficient emission allowances annually to cover their CO2-eq. emissions. These allowances would be auctioned by the government annually, after which parties could buy or sell (i.e. trade) allowances in a carbon market, creating a market price for CO2 allowances. From year to year the emission cap would then be lowered, thus reducing aggregate emissions and making allowances scarcer (and thus dearer).

An ETS leads to a carbon price for end-users. Where feasible, suppliers will implement emission abatement measures, by blending biofuels in transport motor fuels, for example. Ultimately, they will pass the (resulting) CO2 costs through to their customers via higher energy and fuel prices, giving end-users a financial incentive to cut their emissions. Consumers will be induced to choose between paying higher energy and fuel bills and taking steps to reduce their energy and fuel consumption. The carbon price will start out low when the ETS kicks off, probably rising to several hundred euros per ton CO2-eq. by 2030 in order to achieve the climate targets. This will mean an increase in the prices of natural gas, petrol and diesel, creating a financial incentive to save energy and blend in green gases and fuels. To compensate end-users for the price rise, government revenue from the auctioning of CO2 allowances can be used to roll out measures aimed at both improved sustainability and tax reduction.