Why pay attention to ETS II?
The transport sector is the only sector whose emissions have been following an upwards trend since 19901. The introduction of an emission trading system for buildings and road transport (ETS II) will lead to a sudden and sharp bending of the curve, with a 5.1% reduction path (linear reduction factor of 5.1% a year) from 2027 onward. In line with European transport projections2, the electrification of the car fleet will not have progressed enough to deliver the necessary emission reductions. This is why ETS II may have significant implications for renewable transport fuel supplies.
These implications are heavily dependent on the expected pace of developments in the buildings sector. If energy demand is reduced and renewable energy increasingly replaces fossil fuels in buildings across Europe, in line with the ETS II reduction path, there will be no short-term implications for renewable fuels in the transport sector. However, this will change from 2040, as the buildings sector may not be able to “absorb” any further emissions reductions by then. In that case the transport sector will hit a hard wall, requiring sudden increases of the renewable fuel supply.
If the buildings sector is not able to bring down emissions substantially in the short term, then be aware that more renewable fuel volumes will be necessary on top of already mandated renewable fuels.
If we assume 2027 (the starting year of ETS II) will be a transition year, and assume a pro rata emission reduction between buildings and road transport, in this situation the ETS II may require 1550 PJ additional renewable fuel supplies in 2028 in EU-27, which is an increase of 110% compared to mandated volumes. In conclusion, reductions due to the linear reduction factor will have to be absorbed by either having less transport or having less heating in buildings, otherwise volumes for renewable fuels will need to increase to double the currently mandated renewable fuel volumes (per the Renewable Energy Directive).
Although there is a market stability reserve that can absorb shocks, we have found that this will not take away the need for more renewable energy.
If you want to learn more about this, join our webinar on Thursday April 13th, where we will share our analysis of the EU '27 market.
1) European Environment Agency (EEA) – Greenhouse gas emissions by aggregated sector (2019). Accessed here on March 15, 2023
2) studio Gear Up analysis on basis of EC – Sustainable and Smart Mobility Strategy (2020) and EC – European Reference Scenario 2020 (2021)