Climate Targets Compatible with Greater Cost Efficiency
Research
12.03.2026
ZEW Study on EU Emissions Trading System for Buildings and Road Transport (ETS2)
With the planned new EU emissions trading scheme for buildings and road transport (ETS2), starting in 2028, European climate policy can become significantly more cost-efficient. However, this would require the ETS2 to be designed as a genuine market-based guiding instrument. These are the findings of a recent study by ZEW Mannheim on CO2 pricing in the EU. According to the study, current EU climate policy will lead to cumulative economic costs of more than five trillion euros in the period from 2028 to 2048. These costs could be reduced by a good 20 per cent, or up to 824 billion euros, if the ETS2 was better designed.
“An EU-wide CO₂ price can reduce emissions where it is cheapest. It is precisely this principle that is currently being thwarted by national budgets and overlapping measures,” explains study author Professor Sebastian Rausch, head of ZEW’s “Environmental and Climate Economics” Research Unit. “The ETS2 presents its own challenges: Its efficiency gains can only be realised if the scheme is not squeezed between national requirements and duplicate regulations. It is therefore essential to allow the price signal to work and to resolve social distribution conflicts through a targeted redistribution of income rather than through price caps or exemptions.”
Fragmented CO₂ prices increase the costs of climate action
The ZEW analysis shows that considerable price differences exist in the current system. Under the present EU Emissions Trading Scheme (ETS1), the CO₂ price will rise to approximately 180 to 200 euros by the mid-2040s, whereas the implicit CO₂ prices in the sectors that do not fall under the scope of the ETS1 (i.e. primarily buildings and road transport) are on average up to 360 euros per tonne in the EU. There are also major differences between the Member States. This fragmentation of the EU carbon market means that emissions are not reduced where it would be most cost-effective. What is needed in the long term is a uniform EU price for CO₂ emissions (integration of ETS1 and ETS2).
National policies dampen the price signal
Many Member States pursue a complex mix of regulatory measures, standards and funding programmes in the ETS2 sectors. These measures are helpful in removing market barriers, but they have the disadvantage of restricting the flexibility of ETS2 pricing. The study shows: To ensure the efficiency potential of carbon pricing throughout the EU is realised, the ETS2 must be freed from binding national carbon budgets and technology policy restrictions. Welfare gains would then increase significantly over time – especially with ambitious reduction targets in place – if the marginal abatement costs increased sharply.
Methodology
The quantitative results are based on a newly developed, dynamic macroeconomic equilibrium model for the 27 EU Member States. The model depicts production, consumption and trading decisions as well as the interaction of ETS1, ETS2, national emissions budgets (ESR) and non-market-based measures. Various policy scenarios up to the year 2050 are simulated.
