How the EU can achieve the 2030 climate targets in the road transport and building heat sectors

This study examines four regulatory options, including carbon pricing, for the road transport and buildings sectors, which are responsible for 40 percent of GHG emissions and so far not covered under the EU-ETS. While a swift harmonization of carbon pricing mechanisms under one uniform framework, covering all countries and sectors, may seem theoretically appealing on the basis of economic efficiency and cost minimization, severe distributional implications, both economically (carbon-leakage) and socially, undermine such options as practicable at least in the short-term. Alternatively, we propose the introduction of a separate 2. ETS in combination with an emissions-oriented reform of the existing energy taxation rules as a framework which proves economically efficient, socially balanced and ecologically effective. Any carbon pricing scenario should integrate complementary social measures for cost redistribution favouring low-income households, as well as measures to maintain industry competitiveness. Additional measures supporting a conversion of parallel carbon pricing systems may minimize the economic costs of the EU Green Deal over the long-term.