EU carbon market expansion to raise diesel prices

EU motorists are set to pay at least an extra 50 cents a litre on diesel from 2031 to cover carbon costs, according to new analysis which raises fears of fresh protests against climate laws.

Fuel suppliers will be required to buy allowances from 2027 to cover their carbon dioxide emissions and are expected to pass that cost to consumers.

Veyt, a carbon market analytics firm, expects the scheme will add 14 cents to a litre of diesel in 2027, with the premium reaching 54 cents per litre in 2031 as more measures are phased in.

Emissions from fuel for heating buildings will also need to be paid for, pushing prices of coal up 68 cents per kg by 2031, Veyt found.

The EU in 2022 agreed to set up a second emissions trading system (ETS2) to cover transport and housing as part of an ambitious set of reforms aimed at cutting EU greenhouse gas emissions by 55 per cent by 2030. It will operate in the same way as the bloc’s original cap-and-trade ETS which covers emissions from power generators and heavy industry.

Under ETS2 no free allowances to cover carbon emissions will be issued. A part of the revenues generated by the levy, however, will be funnelled into a “social climate fund” to help lower-income households and small businesses cover the cost of insulation, energy efficiency or decarbonised transport.

The fund, which promotes the use of less carbon-intensive fuels, also seeks to prevent a repeat of the so-called gilets jaunes protests in France in 2018 partly prompted by an increase in national taxes on diesel aimed at bringing down the country’s CO₂ emissions.

Rising fuel costs were also a driver for farmers’ protests across the EU earlier this year.

“I think it has been a very political choice to set up this fund,” said Marcus Ferdinand, chief analytics officer of Veyt.

He believes the scheme will be effective, triggering a “sizeable wave of emissions abatement equivalent to about 400Mt over all covered sectors by 2040”, with road transport most affected.

Peter Liese, a centre-right German lawmaker who negotiated the ETS2 measure, said there was “no alternative” to carbon pricing for cutting emissions “unless you want to torture people with detailed decisions”. He cited a poorly communicated decision by the German government to phase out gas boilers that prompted a strong backlash.

“If [EU] member states try to decarbonise without the ETS it will be much more expensive and much more bureaucratic,” he added.

But Pascal Canfin, the French chair of the European parliament’s environment committee, warned that if the carbon price went too high “it would obviously be unacceptable to all Europeans”.

Johan Mattart, head of the Belgian Federation of Fuel Distributors, said companies had received letters in recent weeks from regional authorities about their obligations under the scheme, but there is confusion over who will be covered by it and how to prepare for monitoring.

The fuel distributors group is pushing for the use of hybrid heating fuel containing vegetable oil, to cut emissions and lower costs for consumers.

“The aim of the directive is of course to reduce CO₂ emissions, but I am afraid not all households can afford a heat pump and not all houses are suited for this,” said Mattart. He added that governments were providing incentives to people to buy electric cars, “but not everyone can afford one”.