Carbon pricing can be implemented in different ways. The most relevant and best known at EU level is the emissions trading scheme or ETS. At national level, we have seen the adoption of carbon levies (or taxes) in multiple, and different EU Member States. In fact, 15 EU Member States have implemented a carbon tax or equivalent, while the remaining ones are considering it. The caveat is that in most of these countries the carbon prices are still too low to be considered as meaningful instruments.
While this main EU-wide carbon price instrument, the ETS, was not applied to heating and cooling at residential level, it is now being considered by the European Commission. The Commission is expected to announce on the 14th of July a large number of initiatives aiming at cutting greenhouse gases emissions at a faster pace, in line with the recently increased goal to cut net emissions by 55 % by 2030 in the EU.
Among the proposed measures, the European Commission will propose reforms to the emissions trading scheme and the introduction of a carbon border adjustment mechanism, a border levy to impose CO2 costs on imported goods. This will most likely apply to emissions from iron, steel, aluminium, cement, electricity and heating and cooling, a detailed list of the covered products can be found in Annex I of the regulation. The revenues will be earmarked for foreign green transition aid. The measure will be phased in from 2023.
This initiative from the Commission will obviously require the support of the member states and the European Parliament. Despite this measure being far from consensual, we have already seen countries such as Germany stepping forward in support of it. Many stakeholders and even Member States have expressed their concerns about the implications of these measures in the heating sector, the complexity of its implementation, and the potential backlash from public opinion, considering previous experiences such as the yellow vests movement in France.
There are some interesting examples of the application of a carbon levy, such as Switzerland, where the collected funds revert to low-income consumers. Similarly, the Vice-President of the European Commission, Frans Timmermans, recently stated that part of the revenues generated from including road transport and buildings in the ETS will be earmarked to compensate the transition costs for vulnerable citizens.
The EU-ETS covers installations above 20 MW. The residential and non-residential sectors, as well as small industries, are not covered so far. There is a growing understanding of the need to address the decarbonisation of the energy supply to buildings, and in particular heating. Buildings (residential and non-residential) represent 40% of EU energy consumption. A whopping 85% of energy consumption in the residential sector is for thermal energy, (75% for space heating only, roughly 13% for domestic hot water), of which only 11% is from electricity, 43% comes from natural gas, and 13% from heating oil.
In the services sector, 62% of energy consumption is for space heating, of which 28% from electricity, 49% from natural gas, and 15% from heating oil.
Of all the energy used in buildings, only electricity (less than 20% of total consumption) is covered by the EU-ETS. The vast majority of the energy consumption in buildings is natural gas, which together with fuel oil, is not covered by the ETS.
Carbon pricing measures have a double effect. On one hand, they increase the cost of fossil fuels, compensating for the negative externalities that these create, and which have not been reflected in their final price. On the other hand, these measures gather funds that can be (even if only partly) relocated towards investments in renewable energy, in particular for those at risk of fuel poverty.
All in all, it is clear that carbon pricing applied to the heating sector is a hot topic, be it at the national level, with measures such as carbon taxes, or at the European level, with a revision of the Emissions Trading Scheme. In Solar Heat Europe we are in the process of developing further our position on the matter and we shall provide additional opportunities for internal discussion over the coming period.
Until then, we invite all members to share with us their views on this – can Carbon Pricing be a game-changer for solar heat?
Source: SWD EU Heating and cooling strategy, pp. 8, 10, 30, 21, 32.