European Union leaders were gathering in Versailles, France, on 10-11 March to discuss a motion to ban the bloc’s imports of Russian oil, gas and coal. From the point of view of achieving decarbonisation of the European economies, this is a historic opportunity. The potential import bans are likely to be painful in the short run but could accelerate the process originally planned by EU lawmakers and which is in the interest of all people living on our planet: cutting or eliminating greenhouse-gas emissions. What may start out as an import ban – a seemingly temporary action– could eventually result in a permanent change in the way Europe’s citizens will travel, heat their homes and transport goods. The current situation may be seen as an opportunity like the oil crisis in the 1970s, which – besides other key impacts – contributed to the development and spread of wind energy globally.
Russia alone supplies 40 per cent of the EU’s natural gas, with Germany, Italy and several Central and East European countries particularly reliant on Russian imports. Furthermore, around 25 per cent of crude oil used in the region also flows from Russia.
Cutting Russian fossil fuel imports as per the REPoweEU plan will be an important step leading to a more environment-friendly and a more sustainable energy use in Europe, contributing to the fight against climate change and further improving energy security.
At the heart of EU policies stands the Emissions Trading System (ETS), which has been in place since 2005. It aims to reduce the emissions of greenhouse gases in the most polluting sectors – namely energy, chemicals and cement and steel production, which account for 40 per cent of the EU’s total emissions. It took a while until the ETS became a powerful tool, but after its growing pains – mostly a result of emissions caps that were too high and therefore too many allowances available – in the 2009-2020 period emissions quotas were traded at reasonable values.
The EU has been constantly fine-tuning and reforming the ETS since it started, to address the flaws in the mechanism. The latest reform was introduced in July 2021 as part of the EU’s Fit for 55 climate package aimed at reducing the EU’s GHG emissions by 55 per cent by 2030. The reforms might extend the ETS to include emissions from road transport and buildings. From 2028 these two sectors might be added to a separate trading scheme that works in parallel with the ETS.
Why road transport and heating?
At Cambridge Econometrics, we have prepared analyses for the European Climate Foundation looking at how to reduce transport and heating emissions in Europe to achieve the climate neutrality goal set for 2050.
We’ve found that while a substantial volume of emissions still stems from heavy industry, the chemical sector and power generation, road transport and heating of buildings remain significant polluters. Without cuts in these two areas, the EU’s climate goals cannot be reached.
The EU’s Fit for 55 package calls for a 43 per cent cut in emissions generated by these two areas from 2005 levels by 2030. However, in this area, the EU aims to set goals and leaves it up to the Member States to find the most suitable tools and ways to achieve them.
With the right policies in place, road transport emissions can be cut more rapidly, as it is faster to replace cars, trucks and buses with more efficient and less polluting models than retrofitting buildings and replacing their heating systems. A recent article pointed out that 80 per cent of the buildings that will be standing in 2050 are already built. Now the challenge is to make heat pumps and energy efficiency measures more cost-effective compared to the alternative. As the cost of fossil heating increases, the gap will widen. To accelerate the process, national building renovation programs will also be necessary for many countries.
They may come with the added benefit of higher domestic production and higher employment – especially in the construction sector – but a sudden jump in demand may hit capacity limits, both increasing prices further and slowing down the process. At the same time, many of the required measures are considered light renovations, such as insulation, which alone cannot achieve the desired cuts in energy use and emissions.
Market forces or regulations?
The emissions goals set out for buildings and road transport can be achieved partly by national programs – and their fine-tuning – as well as the extension of the ETS mechanism to include them. From economic, environmental and social perspectives the two types of measures will result in different effects, so their combination may be the desired path to follow.
Our analyses have shown the revenues national governments can earn from the national sale of emissions allowances could be used to mitigate these social impacts. Such additional revenues expected from expanding the ETS are currently estimated at 72 billion euros across the EU, however, emissions allowance prices are uncertain now because a possible shift away from Russian gas implies more rapid decarbonisation in existing ETS sectors and could reduce demand for allowances.
In the meantime, the war on Ukraine and sanctions against Russia have driven energy prices through the roof and impacted the security of supply. The situation has intensified and national governments must now come up with solutions to ensure the security of supply while providing affordable energy for their populations. Due to the war and subsequent sanctions, energy prices have skyrocketed globally, including in Europe and the CEE region, prompting governments to react rapidly. This offers an unprecedented opportunity to make substantive and long-lasting changes and to speed up the transition to zero-carbon road transport and buildings. This will deliver improved environmental outcomes, as well as improving energy security and independence for the countries of Central East Europe.