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New policy brief: FORGOTTEN FOUNDATION. Buildings and energy efficiency in the new architecture of carbon pricing in the EU

One of the most important topics in the public debate on the energy transition is the recent increase in price of CO2 emission allowances under the EU ETS and its impact on electricity prices. Much less attention is paid to carbon pricing in sectors which are not currently covered by the EU ETS, i.e. buildings, transport and agriculture, waste and small industrial plants.

The latest policy brief Forgotten Foundation. Buildings and energy efficiency in the new architecture of carbon pricing in the EU by Piotr Chrzanowski, Aleksander Śniegocki and Izabela Zygmunt explores this issue and explains why comprehensive approach to all climate and energy targets – including energy efficiency – is crucial for efficient transition.


Summary

  • Greenhouse gas emissions not covered by the EU ETS emissions trading system (including those from the building sector), are not ‘free’. They are covered by a mechanism similar to the one known from the Kyoto Protocol — emissions trading takes place not between companies, but between governments which are obliged to meet binding national reduction targets.
  • Due to a combination of regulatory and market factors, in the past decade, Poland did not have a systemic problem with meeting the national emission reduction targets for the non-ETS sectors, so it did not incur any costs due to insufficient pace of emissions reductions.
  • In the years 2021-2030, this situation will change. With the introduction of a much more ambitious reduction target, the pressure to rapidly and deeply reduce emissions in the entire economy, including in the buildings sector, will increase significantly. Regardless of whether the European Union decides to extend the EU ETS to new sectors or sticks to the current regulatory framework, GHG emissions from the building sector will start to generate significant costs, directly for businesses and citizens (if the EU ETS is extended) and for the national budgets (under the existing system of binding national targets).
  • While the role of renewable energy sources in achieving emissions reductions is known and often emphasized, the role of energy efficiency is often overlooked. However, a closer look at the current system of EU emissions reductions tools and their potential evolution indicates that energy efficiency — which is particularly important in the sectors not covered by the EU ETS — should be treated as a priority on a par with the development of renewable energy sources, especially in the buildings sector.
  • National policies to support energy efficiency should take into account the total cost of emissions in all sectors and their likely future increase as the EU transitions towards climate neutrality. The cost-benefit assessment of both support tools and state-imposed energy efficiency standards cannot be based solely on the current energy prices and ignore the current and future costs of emissions from fossil fuel combustion. Taking these factors into account should lead to:
    • setting higher energy efficiency standards, e.g. for new and renovated buildings,
    • rewarding investments in energy efficiency that bring greater energy savings (e.g. thorough deep renovation),
    • early introduction of national tools mitigating the expected future increase in the cost of fossil fuels use, such as banning the use of fossil fuels in new and renovated buildings, or gradual implementation of national taxation on emissions from sectors not covered by the EU ETS.

The policy brief can be accessed at the following link

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