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Carbon pricing has been a part of how the European Union penalizes carbon emissions since 2005. As part of the EU’s Fit for 55 update to the carbon market, emission trading expands to include heating and road transportation. However, instead of folding them into the broader market, these two sectors will have their own parallel trading setup.
It would also be a cap and trade system and start in 2025, after the anticipated years of EU negotiations ahead of the giant package.
Down the road, both systems could be merged.
Why This Matters: The original carbon market has decreased emissions in the sectors it covers by 42.8% since its 2005 launch. That current scheme only covers about 41% of all emissions—and adding heating and transportation would come close to putting a financial cost on nearly all carbon emissions. With emissions from transportation rising even as others fall, there’s an increased urgency to address this sector. Reuters called it “the biggest revamp…since the policy launched in 2005.”
An Equitable Approach to Carbon Pricing: While the current carbon market works with electricity generation and industry, bringing road transportation and buildings into the fold means individuals would feel the price increase when they fill up a tank of gas or pay a heating bill. To make sure the market doesn’t punish people who can’t afford an electric car, the EU’s next central budget includes €72bn for a “social climate fund.”
This part of the proposal has brought up the specter of France’s yellow vest (gilet jaunes) protests, but those protests were about much more than diesel prices — and if there’s a climate takeaway from that moment, the focus should be on the rich paying their share and ensuring that the transition is equitable.
“The lesson of the gilet jaunes crisis is not that carbon pricing is impossible, but that it has to be done with an awareness of the distributional effects. If you want to adjust energy prices you have to offset the higher costs with redistributive payments to those whose incomes are squeezed most severely,” wrote historian Adam Tooze.
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