What’s new?
The Emissions Trading System – ETS – has the aim is to reduce emissions of greenhouse gases in the European Union.
ETS 1 only covered industries with heating boilers larger than 20 MW, and the industries themselves have had to manage their emissions rights.
Mainly tackling the problem of emissions in electricity production and heavy industry, ETS 1 gave good results on scope 2 emissions, i.e. indirect emissions from purchased energy. During 2005 – 2023, ETS 1 reduced emissions in the sector by 47%, and resulted in investments of 400 billion euros in wind power and solar cells.
Now comes ETS 2, including all trade in fossil fuels for heating and transport. ETS 2 also includes minor industries using fossil fuels for energy that previously was not regulated under ETS 1.
ETS 2 has a broader focus on scope 1, i.e. direct emissions in one’s own operations through, for example, fuel combustion in heating boilers.
It is a clear signal to industries to reduce their fossil fuel use, and the EU points out that other measures are needed in parallel, for example subsidies for green transition.
ETS 2 is introduced gradually, with full operational start planned for 2027.
What’s the impact of ETS 2?
Until 2035, CO2 emissions need to be reduced by 450 Mt, and of these, approximately 240 Mt is estimated to be heat for industries and buildings, which corresponds to a full 1000 TWh of heat.
Industries will now be subject to requirements to buy emission rights for their carbon dioxide emissions, implying new costs and administrative requirements to handle.
The goal is to reduce emissions by 42% by 2030 compared to 2005. The number of available emission rights will decrease and create incentives to invest in renewable solutions with support from the Climate Social Fund (see below).
What will be the cost?
The prices of emission allowances are initially expected to be lower than in ETS 1, with a ceiling of € 45/ton until 2030.
The price for the emission rights is baked into the fuel price and paid by the person who sells gas or oil.
The ceiling of 45 €/MWh means that the price of natural gas will increase noticeable compared to today’s prices.
Income from emission rights will go back to climate investments and energy projects via the Climate Social Fund, creating opportunities for the development and expansion of renewable heating solutions. The Social Climate Fund will distribute just under 100 billion Euro annually.
At the same time, the EU introduces a new duty, “Carbon Border Adjustment Mechanism (CBAM)” which shall ensure that goods which imported from countries without taxes on carbon dioxide emissions pays their share.
How to prepare for ETS 2?
The broader focus on scope 1 that ETS 2 brings is a clear signal to industries to reduce their fossil fuel use. The trading system will start successively with full operational start planned for 2027.
Being well prepared will provide an advantage when the effects of ETS 2 materialize. When choosing a renewable heat solution, it is important to consider which technology is best suited for your production needs.
Depending on the conditions of the facilities, a collaboration of heat technologies is often recommended. A customized integration between technologies combined with a heat storage can optimize the price and overall system performance.
