Econonomics of Energy and Environmental Policy

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Should the EU ETS be Extended to Road Transport and Heating Fuels?

This paper considers the current proposal to extend the EU ETS to cover CO2 emissions from the combustion of heating and road transport fuels. We argue that increased coverage of the EU ETS, together with a binding cap consistent with a net zero trajectory, would provide an EU-wide quantity backstop ensuring that the EU's cumulative emissions budget constraint is satisfied. As such, working alongside standards-based policies currently enacted in the covered sectors, it has the potential to (i) enhance environmental effectiveness by providing an intertemporal incentive for additional emissions reduction and (ii) enhance the (cost) efficiency of EU-wide climate policy by ensuring that no low-cost emissions reduction is left unexploited. Distributional implications remain a serious challenge to such an extension, but several mechanisms are available to alleviate them.
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Keywords: EU ETS, transportation, heating, CO2 emissions, net zero, decarbonization

DOI: 10.5547/2160-5890.11.1.mpol

Published in Volume 11, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.


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