The European Commission is gearing up to target CO2 emissions from the transport sector as part of its plans to cut greenhouse gas output by 55% below 1990 levels by 2030.
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The EU's executive arm is set to unveil a standalone carbon market for the road transport sector that will target upstream fuel providers, according to draft documents leaked in late June.
From 1990 to 2019, EU transport emissions increased by 25%, bucking a wider trend of falling emissions in electricity generation and, to a lesser extent, industry.
According to S&P Global Platts Analytics, EU transport emissions of 1.17 billion mt CO2 in 2019 would fall by just 6% by 2030 under a Most Likely Scenario.
To get on a Two Degree Scenario pathway, transport emissions would need to fall by 22% to around 900 million mt (see infographic charts).
This puts transport front and center in the EU's 2030 emissions reduction challenge, with a need for new mechanisms to help decarbonize the sector.
As part of 2030 climate proposals due on July 14, the EC is set to unveil a separate Emissions Trading System for road transport and buildings, according to draft documents.
"Today, road transport accounts for a fifth of the EU's greenhouse gas emissions and increased its emissions by over a quarter since 1990," the EC said.
"As already considered in the European Green Deal Communication, the Commission is proposing to include the building sector and road transport into emissions trading," it said.
This would provide for increased economic incentives to reduce emissions in these sectors and increased certainty of delivery, the EC said.
Separate ETS for road transport, buildings
A separate carbon market for road transport and buildings would "avoid any disturbance of the well-functioning emissions trading system for stationary installations and aviation, given the different reduction potentials in those sectors and different factors that influence the demand," it said.
The EU ETS covers electricity generation, heavy industry and aviation, while sectors outside its scope are covered by the Effort Sharing Regulation, which includes road transport, buildings and waste. This is also being revised under the package.
The new ETS proposals indicate a greatly scaled-down role for the Effort Sharing Regulation, and a significant expansion in scope for carbon trading.
"In road transport, emissions trading would have the advantage of capturing fleet emissions under the cap and simultaneously incentivizing behavioral change with lasting effects on mobility solutions through the price signal," the EC said in draft documents.
"Nevertheless, the CO2 emissions performance standards for cars remain the main driver to ensure the supply of modern and innovative clean vehicles, including electric cars."
In parallel to applying emissions trading to road transport, the Commission is to strengthen CO2 standards for cars and vans for 2030 in the package.
With memories still fresh of the widespread "yellow vests" civil society movement in France, which was bitterly opposed to increased fuel taxes, a part of the revenues generated by emissions trading in the new sectors could be used to address social impacts, the EC said.
The extension of emissions trading to road transport and buildings requires an upstream approach to regulated entities, the EC said.
This suggests the requirement to buy carbon allowances would apply to providers of liquid transport fuels and natural gas for heating.
The new system would require companies in the road transport and buildings sectors to report their emissions for years 2024 and 2025, while the issuance of allowances and compliance obligations would apply from 2026.
A figure detailing the emissions reduction target for 2030 for road transport and buildings was left blank in the draft proposals, suggesting agreement has yet to be found on the overall level of ambition.
EC targets shipping emissions
In addition to a new carbon market for road transport and buildings, the EC will propose expanding the existing EU ETS to include CO2 emissions from shipping, according to the draft documents, confirming widely held market expectations.
"To date, no adequate measures are in place, either at the global level or in the EU, to achieve the emission reductions necessary from the maritime transport sector to be in line with the EU's increased level of climate ambition," the EC said.
Shipping will be included in the EU ETS from 2023 in a phased-in approach that would see shipping companies required to cover a proportion of their annual obligations in the initial years, rising to 100% by 2026, according to the draft. Any surplus allowances in the initial phase would be cancelled each year, it said.
This would add about 90 million mt of CO2 to the EU ETS, keeping any impact on the other sectors limited, the EC said.
The proposal appears to include voyages originating at non-EU ports as well as those within the EU.
In addition to existing EU ETS rules on penalties, failure to surrender allowances for two or more reporting periods would result in shipping companies being denied entry into an EU port, the EC said.
The wider basket of measures for shipping emissions also includes the FuelEU Maritime initiative, which aims to increase the demand and deployment of renewable alternative transport fuels, as well as a proposal to review the Energy Taxation Directive with regard to the current exemption of fuels used by ships from taxation.