EU ETS2 ‘Road’ - Why it’s already time to get prepared

Key points

• EU ETS2 'Road', which will come into effect in 2027, is set to impact logistics by including road transportation in the European Emissions Trading System, increasing costs for non-compliance
• Companies need to assess their fleets' emissions and prepare for potential financial impacts due to these upcoming changes
• Investing in/choosing carriers with cleaner, more efficient vehicles and technologies is crucial to mitigate the costs associated with the new regulations
• Early preparation and strategic planning are essential to ensure a smooth transition and maintain competitiveness in the evolving regulatory landscape.

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After the European Union’s ETS1 (cf. our last blogpost) and its taxes on fossil fuels in shipping, ETS2, which notably covers road transport*, will come into effect in 2027. What does this mean for shippers?

Reducing emissions through trading

If Europe is set to very nearly meet its emissions reductions target by 2030, it is at least in part due to the continent’s carbon taxes on the most emissive sectors of the economy, of which transportation is one (some estimates put the sector at 20% of global total emissions, with three quarters of that share coming from roads).

The good news: as the EU itself affirms, ETS1 (its first Emissions Trading System) has already lowered industry and electricity production emissions by 47% since 2005. This target has been raised to 62% by 2030, and ETS2 should be a key contributor to that goal.

With one key difference: this time, it’s the fuel producers who will incur the extra cost.

Whereas with ETS1, airlines and shipping companies pay for what is essentially the right to emit CO2e, ETS2 targets the source of the emissions: the fuel producers. Indirectly, those costs will most likely be passed on to end users, namely carriers and consumers.

Why? Firstly, because the same system as ETS1 would oblige consumers to submit complicated emissions reports, which is why ETS2 puts the onus on fuel producers. Secondly, as ETS2 will make fossil fuels more expensive than more sustainable alternatives like biofuels, customers and carriers alike will be incited to buy the latter instead, and/or to collaborate on smarter transportation methods and investments.

How does it work?

1. Each European state will decide how many CO2e quotas it makes available each year
2. ETS2-imposed companies such as fuel producers will be able to buy these quotas - also known as “allowances” - from 2027, whenever they like during the year. They will most likely do so when the quotas cost the least (like stocks on traditional markets, their values vary over time)
3. ETS2-imposed companies have three months after the end of each calendar year to submit their emissions report for that year
4. Then, another three months later, they have to ‘pay’ by giving back to the government the quantity of quotas relative to their emissions
5. Companies will recoup their extra expenditure (on quotas) by increasing their prices (e.g. of fuel).

As for the quota value, whilst on the ETS1 market today, one ton of CO2e is worth around €80, on the ET2 market, a price control mechanism (market stability reserve) will be used if the price significantly surpasses €45 for more than two months. According to Pascale Pujol, Founder of Missions CO2, this means ETS2’s price per ton should not surpass €60, at least at first.

How much will it cost?

Should this €60/ton price stick, Pujol expects overall annual transport costs to increase by 3.2%; and the cost of diesel at the pump to go up by 8.8%. Considerable hikes, then, for all shippers and carriers to start considering right now.

This figure concurs with the extra fuel costs calculated by Searoutes for ETS1: an additional 2.9% for a standard Shanghai to Rotterdam trip early 2025.

What does it mean for carriers? And why now?

EUTS2 comes into effect in 2027, as in all fuel-related emissions from that year at the latest will have to be counted - and auctions to start buying allowances start then - for a first payment in 2028.

According to Pujol, shippers must start anticipating these new charges now, because contracts with carriers generally cover 1-2 years. Therefore, ETS2 has to be taken into account for all contract renewals with carriers with a European scope.

So, how can shippers anticipate ETS2? For Pujol:

• By using visibility platforms like Shippeo to calculate their exposure to these charges. As any fuel purchased in Europe is concerned by this new regulation, it’s possible to get a heads-up by checking:
  
  • Scope 3 emissions of all of your transportation orders
  • Total distances covered
  • Lead time impacts of switching from one mode to a more sustainable one, e.g. from road to rail
  • Emissions breakdowns per fuel type and territory 
  • Whether your carriers’ emissions are decreasing or not
• By reducing your exposure to ETS2 by inciting your carriers to switch to cleaner fuels. This may take some effort, considering 90% of trucks still run on diesel today; but costly switches to fully electric fleets aren’t the only immediate solution, says Pujol. Trucks can be adapted quite easily and cheaply to run on biofuels like B100 or HVO instead of diesel…
  
  • Biofuels like these will also be taxed under ETS2, but at a lower rate, given their considerably lower carbon content, reminds Searoutes’ VP Customer Success Paul Canessa. Indeed, as Pujol points out, whilst diesel’s fossil percentage is 93.5%, B100’s is just 6.4%, so it will be significantly less taxed.

What else do I need to know?

Naturally, there are exceptions:

• There will be no double taxation with ETS1, so if fuel is sold to any industrial concerns already paying under that scheme, no extra ETS2 costs will be incurred
• Specific sectors, such as agriculture or the military, are exempted from ETS2
• Countries which already have a local carbon tax mechanism in place may enact ETS2 with different timing; otherwise, the taxes will be enacted at the same time in all European countries. 

What’s next?

Monitoring and reporting of emissions for ETS2 has already begun this year, ahead of the scheme’s official launch, in 2027. That year, a 30% higher volume of quotas will be auctioned, to provide market liquidity. However:

• The total volume of quotas will decrease over time, to encourage the gradual phasing out of fossil fuels (an ETS2 cap will be set to bring emissions down by 42% by 2030 compared with 2005 levels)
• There will be no free quotas (as was initially the case with airline companies under ETS1)
• States will only intervene if the cost of each ton of CO2e surpasses €45 for more than two months. By making more quotas available, they should indirectly drive down their cost.
  
  

Funds generated by the sale of carbon quotas will be invested into low-carbon or high-energy efficiency technologies.

What goes around, comes around…

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*ETS 2 covers road transport, buildings, construction and small industry

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