With the launch of the European Emissions Trading System EU ETS2 from 2027 onward, the pricing of CO₂ emissions in the building and transport sectors is moving into the spotlight of European climate policy. A recent analysis shows that CO₂ prices in the new emissions trading system could rise above €160 per metric ton of CO₂ equivalent (CO₂-eq). This would be significantly higher than previously expected by the European Commission and would have noticeable impacts on households and—through distributional effects—on economies as a whole.
In the analysis “Impacts and Price Paths of the EU ETS2” by the Institute of Energy Economics at the University of Cologne (EWI), authors Polina Emelianova, Philipp Artur Kienscherf (Project Manager), Tobias Leibfritz, and Nicole Niesler use a numerical energy system model and an EU ETS2 model to simulate a possible CO₂ price path. The calculated price path is based on simplifying assumptions and should be interpreted as a scenario and starting point for further investigation. The study was funded by the Society of Benefactors to the EWI (Gesellschaft zur Förderung des Energiewirtschaftlichen Instituts an der Universität zu Köln e. V.).
Under the scenario examined, the CO₂ price path increases from about €120/t CO₂-eq in 2027 to over €200/t CO₂-eq by 2035. This carbon pricing level would not only exceed the European Commission’s target of €45/t CO₂-eq but would also be significantly higher than the current price in the German National Emissions Trading System (nEHS) of €55/t CO₂-eq. The primary reason is the high short-term marginal abatement costs in the end-use sectors. Marginal abatement costs refer to the additional expenses incurred to avoid emitting one more metric ton of greenhouse gases.
“Especially in the European building sector, short-term emissions reduction potentials are limited,” says Philipp Artur Kienscherf, Head of Research Area at EWI. “Investments, for example in heat pumps or building renovations, are necessary to achieve climate targets, but they are costly—and they are progressing slowly.” In the transport sector, the projected equilibrium price path would likewise spur significantly higher investment in climate-neutral vehicles than previously seen.
Although the Climate and Social Fund (CSF) was contrived to cushion social hardships, it remains unclear whether its compensation payments alone can fully mitigate disruptive effects during the transition from the national EHS to the EU ETS2. Beyond the national allocation of revenues, the mechanism also involves Europe-wide redistribution. For Germany, the scenario considered shows total certificate costs of more than €20 billion for private households by 2032, with no corresponding public revenues from the EU ETS2.
At the same time, it is evident that political and behavioral uncertainties could reduce the effectiveness of this market-based instrument. According to the scenario, the end-user prices for heating oil (+50% by 2035) and natural gas (+32%) could also endanger the acceptance of the climate policy instrument, especially if compensation payments are not targeted to alleviate social hardships. Further relief may also be needed for affected commercial enterprises; otherwise, they might pass on additional costs to end consumers, leading to additional distributional effects.
The analysis also shows that no CO₂ price path below €250/t CO₂-eq by 2030 is sufficient to meet the targets of the EU’s Effort Sharing Regulation under the Fit for 55 program. To decarbonize buildings and transport, supplementary measures such as subsidy programs, regulatory requirements, and social compensation will likely be needed.
