One year ago, the European Union adopted a revision of the EU Emission Trading System (EU ETS) to extend its scope to new sectors and cover a larger portion of the EU’s total greenhouse gas emissions. Among other things, this reform introduced the EU ETS 2, a “cap and trade” system similar to the existing EU ETS (1), but specifically targeting emissions from buildings, road transport, and small industrial installations. Starting January 2025, this carbon pricing mechanism will be applied upstream in the fossil fuel value chain, requiring fuel suppliers to monitor and report the carbon content of the products they sell.
Redefining Carbon Pricing for Building, Transport, and Small Installations
The ETS 2 aims to put a price on the emissions of building heating, road transport, and small industrial installations in order to create a trading mechanism that allows emissions from these sectors to be down by 42% by 2030 compared to 2005 levels. This emission reduction was set to be achieved by setting a cap on the total number of available emission allowances (EUA), which decreases annually.
ETS 2 bears similarities to the original EU ETS, which covers stationary installations in specific industrial sectors and power generation from fossil fuels. These similarities include the regulatory framework for Monitoring, Reporting, and Verifying emissions (MRV), as well as the submission of one EUA for each ton of CO2 emitted. There is, however, a significant difference in the person(s) responsible for the compliance with both trading systems.
Unlike EU ETS, where end-users of fossil fuels are responsible for fulfilling the ETS obligations, EU ETS 2 shifts this responsibility to fuel suppliers/traders. Indeed, here the tax will be levied at the point of release for consumption under excise legislation (i.e. tax warehouses) , meaning that fuel traders become the primary regulated entities.
Upcoming Obligations for Fuel Traders under ETS 2
With the enforcement of ETS2 becoming imminent, Belgian fuel traders must take proactive steps towards compliance in order to continue distributing their products in the Belgian market. Starting in January 2025, these entities will be required to meet the following conditions:
- Obtain a Greenhouse Gas Emission Permit: All fuel traders must secure a greenhouse gas emission permit for the delivery of fuels encompassed by the ETS2. Supplying fuels without this permit will no longer be permissible.
- Develop a GHG Emissions Monitoring Plan: Companies must develop a comprehensive monitoring plan that clearly outlines the methodologies for monitoring emissions. This plan is crucial for ensuring accurate reporting and compliance.
- Annual Reporting and Verification: The annual CO2 emissions linked to the consumption of delivered fuels must be accurately reported and subsequently verified by an accredited verification institution.
However, it will not be until 2028 when the EU ETS 2 will enter into full effect. By then, the obligation of regulated entities is to surrender on June 1st a number of EUAs equivalent to the emissions reported in the previous calendar year. Fuel traders will be able to purchase these allowances at auctions organized by auction platforms on behalf of the Member States.
Closing remarks
As the Walloon and Flemish Governments are about to adopt the implementing rules for ETS2, it is crucial for companies to stay ahead of these changes. Early engagement with these developments will be critical for ensuring compliance and leveraging your strategic position in the market.
At PwC we are ready to offer detailed insights and guidance on navigating the complexities of ETS2, providing support through strategic planning, GHG permit application, and monitoring plan development, to ensure a smooth transition into the new regulatory environment. If you want to get more insights in this developing regulatory framework and how it will impact your business, please reach out to Tom Wallyn (tom.wallyn@pwc.com), Caroline Schmidt (caroline.schmidt@pwc.com) or Lorenzo E. Costa (lorenzo.costa@pwc.com).
(1). “Cap and trade” carbon pricing systems involve setting a cap, or a maximum limit, on the total greenhouse gas emissions allowed by all operators under the system. This cap is gradually lowered each year, aligning with the EU’s climate goals and ensuring a steady decrease in emissions over time.
