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A new European emissions trading system will put a price on carbon emissions from road transport, and is expected to lead to higher fossil fuel prices. The system comes into effect in 2027. This is how it will work.
The first emissions trading system, ETS1, was introduced in Europe in 2005. It covers emissions from electricity and heat production, industrial manufacturing, and the aviation sector. In 2027, the EU will launch a second Emissions Trading System (ETS2), this time road transport will be subject to carbon pricing. The system is set to reduce emissions by 42% by 2030 compared to 2005 levels. This is expected to impact the cost structure for transport companies across Europe.
Put simply, ETS2 puts a price on the climate impact of road transport. The EU sets a cap on carbon emissions and the permitted emissions are divided into allowances, which will be auctioned. Each allowance gives the holder the right to emit one tonne of carbon dioxide.
ETS2 is an upstream system, meaning it will be fuel suppliers, rather than end consumers, that will be required to purchase emissions allowances. Within the scheme, companies are able to trade allowances with one another as needed.
When it comes to fossil fuels, analysts across Europe expect that the extra cost for emission allowances will most likely be passed on at the pump, in the form of higher prices for consumers. Exactly how high prices could rise is hard to predict, as it depends on the supply and demand of emissions allowances. Most forecasts suggest an increase of €0.15 to €0.25 per liter of fossil diesel by 2030. Other, more dramatic forecasts point to price hikes of up to €0.5 per liter.
“But that’s the point of the system. It creates a tipping point where switching to electricity, biogas or HVO becomes more economically viable,” says Mattias Goldmann, founder and CEO of the Swedish 2030-Secretariat, which works to promote a fossil-free transition in the transport sector.
At the same time, the price impact will depend on political decisions. If the system draws significant criticism from industry and the public, it will likely be adjusted to reduce the effects on fuel prices.
In any case, renewable fuels, hydrogen, and electricity are excluded from ETS2, so they won’t face any cost increases – making them more competitive. This gives companies already operating on these fuels or on electricity a competitive edge, both in terms of cost and market positioning.
The companies most affected will naturally be those with high fossil fuel consumption. But the consequences will also depend on factors like fleet composition, driving patterns and the fuel tax regime in different countries.
“A company that currently uses large volumes of fossil diesel in a country with low fuel taxes should expect a steep cost increase. At the same time, those who have already invested in electric vehicles, consolidation, or intermodal transport will gain a competitive advantage,” says Mattias Goldmann.
Although the system will take effect in 2027, transport sector stakeholders must already start reporting their emissions
Companies seeking to reduce their exposure to rising fossil fuel prices have several levers to pull. Eco-driving, smart route planning, optimized tire selection and speed management can deliver savings. But the biggest gains will come from switching fuels.
“What was nearly profitable before becomes clearly profitable now. Plus, there’s communicative value – being able to show that you’re a leader in sustainability can be a competitive advantage.”
ETS2 has been criticized for potentially hitting smaller operators harder – especially those in rural areas or countries where diesel has historically been cheap.
“Yes, the system is uneven in that respect. But it will also generate substantial revenue for the EU – and half of that money is earmarked to counteract the social impact. This redistribution is key to preventing widespread protests,” says Mattias Goldmann.
Analysts have differing views on how effective ETS2 will be. Mattias Goldmann is convinced the system will work.
“We’ve seen that ETS1 has worked in other industries. ETS2 will accelerate the green transition – especially in countries that have lagged behind. And it will do so without top-down mandates. The market decides what it costs to continue polluting. It’s an effective way to reduce climate impact.”
