New CAKE VIIEW analysis

New CAKE VIIEW analysis

New CAKE VIIEW analysis

With great pleasure we are presenting the newest CAKE/KOBiZE analysis: „VIIEW on EU ETS 2050: Changing the scope of the EU ETS” made as part of the LIFE VIIEW 2050 project. The publication is available in English.

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    VIIEW on EU ETS 2050: Changing the scope of the EU ETS (7.5 MiB, 1,193 hits)

The published report presents possible configurations of the policy up to 2050, which encompasses emission allowances trading, including various options of extending it to cover new sectors and their impact on the economy, which will be a key part of the debate and decision making process towards the end of this decade.

In the Centre for Climate and Energy Analyses we have developed and are constantly improving a suite of computational tools, thanks to which we are able  to scrutinise and assess current and future climate and energy policy proposals at both the EU and country level. In the current analysis, we present and analyse six scenarios which cover possible solutions regarding the extension of the EU ETS. We consider including just the road transport sector (RT) or both the buildings road transport sectors (BRT) in the current EU ETS, creating separate systems (EU ETS and BRT ETS), and creating a single system for all sectors of the economy. The results show the consequences that each of these solutions will bring for the economy of the European Union and Poland.

Our simulations show that including new sectors in the ETS system will lead to an increase in the marginal reduction costs, mainly due to more expensive mitigation options available in the sectors which are currently not covered by emissions trading. In the scenario where the EU ETS and BRT ETS function as separate systems (which is consistent with the policy proposals up to 2030), the marginal reduction costs in the EU ETS increase from approx. 180 EUR/t CO₂ equivalent in 2030 to 440 EUR/ t CO₂ equivalent in 2050. While these costs might seem high from today’s perspective, for other scenarios they are even higher. For example, including the transport sector in the EU ETS could drive the cost up to 640 EUR/ t CO₂ equivalent in 2050, while including both the buildings and road transport sectors could push the cost up to 800 EUR/ t CO₂ equivalent in 2050. From the mid-century perspective, we observe the highest increase in the cost for the scenario in which we include all the sectors of the economy in the emissions trading system.

From a macroeconomic perspective, covering the buildings and road transport by emissions pricing has a negligible impact on household consumption in the EU, however we can observe some differences across regions. In the long term, Southern Europe will be the main beneficiary of the extension of the ETS, while Poland could see a slight loss in the 2030s, and a slight gain in the following decade. Furthermore, covering these sectors by emissions pricing leads to an increase in efficiency at the level of the EU. As the analysis shows, extending the EU ETS system to cover buildings and road transport in the countries where there is a deficit in allowances (as is the case in Poland) is a better solution than operating separate systems.

The results of the analysis confirm the key role of the electricity generation sector in achieving the zero-emission target in 2050, mainly due to its high potential in reducing emissions. At the same time, with the constant decarbonisation of this sector, extending the EU ETS has little impact and despite differences in emission prices the energy mix does not differ significantly under the various scenarios. This shows that even under a low emission price scenario, the power sector fully utilises its reduction potential.

Emissions from the road transport sector account for around a quarter of EU emissions, therefore transforming this sector is crucial to achieving climate neutrality. Covering this sector by an emissions trading system will lead to an increase in the price of operating fossil fuel vehicles. In the case of passenger cars the average increase between 2030 and 2050 could reach 30% for the EU. This will increase the cost competitiveness of zero emission vehicles (electric and hydrogen) and their share could reach 40% in 2030 and 70% in 2050. The increase in the cost of heavy-duty road freight transport could be even two-fold, and toward 2050 we could expect a large share of hydrogen (share of 60%) and electric (share of 20%) powered vehicles. Covering the agriculture sector with an emission trading system could possibly lead to a serious drop in production, negatively impacting farmers’ incomes, and virtually eliminating food exports, as well as importing half of the food consumed in the EU.

The report also points to the special role of technological and natural options of carbon capture, which will be necessary to achieve climate neutrality.

The analysis was performed using advanced modelling tools developed by CAKE experts. Such an extensive and comprehensive analysis was possible thanks to the implementation of the LIFE VIIEW 2050 project – The impact assessment of the EU Emission Trading System with the long-term vision for a climate neutral economy by 2050 implemented at KOBiZE with the financial support of the LIFE Program and the National Fund for Environmental Protection and Water Management.