The countries in the European Union approved major changes to the region’s carbon trading scheme and emissions laws, making industrial carbon emissions more costly and generating revenues for Europe’s energy transition. The changes add to other recent legislation that applies carbon taxes to imported products such as metals, fertilizers and cement by 2026, and extends emissions caps to its transport sectors. Virtually all major segments of Europe’s economy would be affected by the new laws as energy costs will escalate.
The key changes to the European Union’s Emissions Trading System (ETS) include a steeper decline in carbon emissions of 62 percent from 2005 levels by 2030, and a phasing out of free permits that had been allocated to certain industries, including aviation. Factories will lose the free carbon dioxide permits they currently receive by 2034. Shipping firms will have to gradually reduce their carbon emissions beginning in 2024 or pay new penalties for the carbon they release over the coming years. Emissions from Europe’s buildings, road transport system and other smaller industries will also come under a new trading scheme that will begin in 2027 or 2028, depending on regional power and fuel costs.
EU carbon permits were recently trading at around 94 euros (about $104) per metric ton, having nearly quadrupled in value since the start of 2020. The price reached 100 euros for the first time in February. At $100 per metric ton tax on carbon dioxide, the added cost to 1000 cubic feet of natural gas use would be about $5.32, and $0.88 would be added to a gallon of gasoline.
Chemical producers, smelting and refining units, and the makers of glass, ceramics, paper and cement will have a tough time meeting the new emissions caps while keeping costs in check. Carbon emissions from these sectors can be hard to reduce without expensive facility upgrades that may undermine their international cost competitiveness. This has led some to suggest that Europe is deindustrializing.
Homes, offices and businesses that currently run off fossil fuel boilers or in countries that are fed mainly off coal and gas-fired grids will also have difficulty in economically complying with the new standards, which could mean that “energy poverty” will be growing in the EU as a consequence of rising energy costs. French Minister Macron caused a stir when he suggested his country “was living through the end of abundance.” People and even elected leaders are becoming anxious that in pursuit of climate goals, people are being asked to live with less.
Some financial support will be made available for power system overhauls and facility upgrades, using the funding raised from the ETS and other sources, but the distribution of funds may be a challenge due to the differing systems employed in the EU countries. Poland and Hungary voted no on the changes and Belgium and Bulgaria abstained as the new measures are not universally popular due to the higher costs and more stringent emissions thresholds that come with them.
The Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism adds new taxes on products that are imported from outside the EU for use by carbon-intensive industries. It is designed to prevent companies from moving carbon-intensive parts of their supply chain to areas outside of the EU, and to ensure that companies cannot outsource the parts of their production phase that produce the most emissions to foreign areas. The new mechanism, however, could erode the cost competitiveness of hard-to-decarbonize sectors, such as steel and chemical production. These sectors are major employers across Europe, and sustain lengthy and labor-intensive supply chains that may also be at risk if the main production hubs of those industries cannot be economically sustained in the region.
Aviation Targets
The European Union agreed to set binding targets for airlines in Europe to increase their use of sustainable aviation fuels, in order to kick-start a market for green fuels and begin reducing carbon emissions from the aviation sector. The proposal aims to increase both demand for and supply of sustainable aviation fuels, which are said to have net-zero carbon dioxide emissions or lower carbon dioxide emissions than kerosene produced from fossil fuels. These fuels are currently produced in very small quantities and are extremely expensive–far more than conventional aviation fuels.
Fuel suppliers must ensure that 2 percent of fuel made available at EU airports is sustainable aviation fuel in 2025, increasing to 6 percent in 2030, 20 percent in 2035 and to 70 percent in 2050. From 2030, 1.2 percent of fuels must also be synthetic fuels, increasing to 35 percent in 2050. Synthetic fuels are made using captured carbon dioxide emissions, which supposedly balances out the carbon dioxide released when the fuel is combusted in an engine.
Aviation is seen as one of the hardest sectors to decarbonize, with zero-emission aircraft not expected for more than a decade. Sustainable fuel is seen as a route to start gradually reducing air travel’s carbon footprint in the near-term. Airlines are expected to receive about 2 billion euros ($2.2 billion) in funding from the EU carbon market to help them switch to sustainable aviation fuels. Biofuels can count towards the targets if they comply with EU sustainability criteria. Low-carbon hydrogen produced from nuclear power is also eligible.
Unfortunately for European airlines, the EU aviation rules are likely to distort competition, as the aviation fuel targets would apply to airlines flying from European hubs but not to long-haul carriers flying from elsewhere. Also, the use of some biofuels, including animal fats, could cause shortages in other industries, such as pet food production. Europeans may find pets harder to afford with the rising cost of energy these myriad schemes will have on them.
Final Approval
EU countries and the EU Parliament must each approve the deal before it can pass into law. EU countries will assess them in the next few weeks. That approval is usually a formality – but the process was upended last month when Germany lodged last-minute opposition to a policy to phase out fossil fuel-powered cars.
Conclusion
The European Union has not learned from its energy crisis during Russia’s invasion of Ukraine and are continuing with their carbon reduction policies, increasing the rate of reduction required for carbon emissions and encompassing other sectors in their emissions trading system. Carbon prices are now over $100 a metric ton and are adding to the cost of energy for Europeans as well as to goods that need energy for production. The EU is also pushing very expensive sustainable aviation fuels on its airline industry and instituting a carbon tax on imports. Americans should watch Europe’s carbon reduction laws and policies closely as President Biden will do his best to add them to his climate agenda, increasing the costs of goods and energy for Americans. Americans have traditionally had faith that their futures and the future of their children would be better, and would be hard-pressed to accept what French President Macron called “the end of abundance” as a consequence of climate policies that have not even been voted upon by Congress.
