New EU scheme could hike petrol, gas prices higher than expected, key lawmakers admit

The EU’s new carbon pricing scheme for road and heating fuels (ETS2) – set to be introduced across the bloc in 2027 – could lead to higher price hikes than initially thought, key lawmakers told Euractiv.

As of 2027, the EU will start pricing CO2 emissions from buildings and road transport, with a new carbon pricing scheme, known as the Emissions Trading System 2 (ETS2).

When the system was agreed in 2023, EU lawmakers promised that prices would remain below €45 per tonne of CO2, meaning a price surcharge of about 10 cents per litre diesel or petrol.

Peter Liese (CDU/EPP), who was the European Parliament’s chief negotiator on the file, told Euractiv he was “a little more pessimistic now” that the €45 limit could be kept, “because we are experiencing setbacks in terms of both mobility and buildings.”

Since the ETS2 is market-based, if Europe is less successful at phasing out its reliance  on CO2-intensive energy sources, demand for CO2 emission certificates will rise and the price of carbon will jump accordingly. However, Liese added that “it is our joint task to avoid this scenario”.

Emissions from buildings, mostly caused by heating systems, and road transport, mostly caused by cars and lorries, are currently falling slower than the European Commission forecast.

Meanwhile, additional laws to reduce emissions in those sectors – such as the EU buildings directive or a German law to ban new gas and oil boilers (heating law) – have been watered down substantially, or will only take full effect at a later stage, such as the de facto phase-out of internal combustion engines by 2035.

These developments could lead to higher demand for emission allowances in 2027, and therefore to a higher carbon price.

Heating regulation provoked backlash

The situation in his native Germany particularly concerns Liese: “Last spring, a lot of people were still determined to install climate-neutral heating systems,” he said, adding “the debate about the heating law has caused a setback”.

2023 saw Germans install 790,000 new gas boilers – more than in any of the previous 20 years. Many say this surge was due to an eleventh-hour panic, in which homeowners raced to install new gas boilers before they are banned by the upcoming rules.

On transport emissions, Liese claims German transport minister Volker Wissing (FDP/Renew) “is not really doing anything” – pointing to falling sales of electric vehicles (12.2% of all new vehicles in April 2024, versus 14.7% in April 2023).

Germany’s failure to reach its climate targets in these two sectors means that “pressure on certificates is then greater and prices are rising” according to Liese.

€45 ceiling ‘a very soft brake’

Other lawmakers share the concern that prices will exceed €45.

“€45 is not a hard limit in the current design, but rather a very soft brake,” Tiemo Wölken, German MEP and coordinator on environmental policy for the centre-left S&D group told Euractiv.

“Current studies […] assume that the price could rise towards €200 per tonne” he said, pointing to research by German think-tank Agora Energiewende.

To avoid “social imbalances”, more money is needed in the EU’s €87 billion social climate fund, which is meant to mitigate the new carbon price’s impact on the poorest, Wölken said.

“It is good to see that Mr Liese now seems to realise what we have already pointed out in the negotiations on the ETS,” he added.

What lessons to learn?

In April last year, Liese said that the there was a “relatively high” probability that prices will remain below the €45 threshold – and Wölken’s group colleague Mohammed Chahim (PvdA/S&D) also noted there was “no need to already assume price increases for households”.

While, at the time, similar comments were made by Green negotiator Michael Bloss, he now told Euractiv that “it is becoming increasingly likely that the costs could rise above €45 due to the CDU’s blockade of other legislation”.

Bloss acknowledged that such price increases would threaten the success of the scheme, “as it is clear in the EU that a very high price is not politically feasible in Southern Europe.”

For Liese however, the lesson from the German heating law – and the backlash caused by it – is fundamentally different.

“I had actually thought that we had learnt from the heating law that regulatory law does not lead to a better result than a market economy,” he said, blaming the Greens for still believing too much in prescriptive regulation – and the Social Democrats for “wobbling” in their support for the ETS2.

Instead, more targeted support is needed to support low-income households move towards climate-neutral alternatives, he said: “Social problems exist above all among those who earn below average”.

“Loosening the ETS2 does not solve a single problem. Other measures would then have to be taken to reduce emissions,” Liese said, adding that these actions “may be more expensive and meet with more resistance”.

[Edited by Donagh Cagney/Anna Brunetti]

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