Position Paper: EU Emissions Trading System for buildings (ETS2)

The European Commission made a proposal in July 2021 to establish a new ETS for buildings to stand beside the existing ETS for energy-intensive industries. The proposal envisages a carbon price being put on fossil fuels that are used for heating in buildings in the EU that will be paid by energy suppliers.

The expectation of some in the EU institutions is that this new ETS, known as ETS2, will incentivise building owners to renovate their buildings, raise funding to finance climate action in the Member States, and act as a complement to the regulatory requirements contained in the recast Energy Performance of Buildings Directive (EPBD).

EuroACE examined the proposal and found that:

• The proposed ETS2 will only be one small element in a broader policy and legal framework and will only have a marginal effect on encouraging energy renovations in the EU
• Member States must maintain and increase their efforts to ambitiously implement the broader energy efficiency policy and legal framework on energy renovation and not be distracted by expectations that the ETS2 will be highly effective
• There is a high risk of negative distributional effects that will burden those in energy poverty and in low-income groups
• The elasticity of pricing fossil fuels is very low, with several studies indicating that a price in the region of €300 per tonne is needed to motivate additional actions
• The ETS2 has the merit that it will raise funds (to be lodged in the Social Climate Fund) that can be used for energy renovation and to alleviate the burden on the most vulnerable. However, the proposal for the disbursement of monies from the Social Climate Fund will not address energy renovation at the scale needed
• Setting up and implementing the proposed ETS2 will take several years, thus delaying any positive effects it may bring. Any positive effects will come too late for the buildings sector

It is the position of EuroACE that carbon pricing alone cannot overcome the barriers that hinder the uptake of energy efficiency measures. Those barriers are mostly non-economic, and a strong regulatory framework, well anchored in the Energy Efficiency First principle, is the best solution to increase the rate and depth of energy renovation in the EU.