Emissions allowances in the EU ETS 1 system have been part of the energy industry in Europe since 2005. Their objective is well known – to penalize greenhouse gas emitters and subsequently allocate the collected funds to support the modernization of the energy sector. It must be said that although emission allowances are often portrayed as the worst possible tool, they do fulfill their basic purpose to a certain extent – specific CO2 emissions in the large energy sector are being reduced on the European continent. In this case, large means above 20 MW, above which operators are required to purchase emission allowances and reflect them in energy prices.
Even small sources up to 20 MW will have to pay for burning fossil fuels
Over the years, this market setup has encouraged the gradual modernization of large sources. Between 2004 and 2022, the share of renewable sources in EU electricity production increased from 16% to almost 40%, while the share of fossil sources fell below 40%. And despite the problems and controversies associated with the EU ETS 1 system, it was decided in 2024 to introduce the second phase of EU ETS 2 emission allowances. To a large extent, the division of the market into two categories was unfair and often led to differences in end energy prices and administrative burdens for businesses operating on the borderline between the two categories.
The new system should level this difference, as the obligation to pay for the combustion of fossil fuels applies to all operations that burn fossil fuels, including households and transport! The entire part of the economy linked to fossil fuels would thus be subject to a basically uniform tax, with the revenue from this tax being distributed directly in the form of subsidies for modernization in the energy sector, thereby contributing to reducing the use of fossil fuels to zero.
The question arises as to why the EU ETS 1 system could not simply be extended to smaller operations. Under this system, payments are made for actual emissions based on records of fuel burned and measurements of exhaust gases. Such a system could not, in principle, be applied to smaller operations or transport. The EU ETS 2 system therefore transfers the payment obligation to fuel suppliers (refineries, coal and gas suppliers, etc.) and passes it on to the end consumer in the price of fuel.
The economic impact can be avoided by combining low-emission and stable sources
But what economic impacts can be expected? They will certainly not be low. Like EU ETS 1, EU ETS 2 will have a market-based value and the aim is to gradually increase the price so that burning fossil fuels becomes less and less advantageous. There is talk of an initial price of EUR 10/tCO2, with an early increase to around EUR 45/tCO2, but after 2030, the price is expected to exceed EUR 100/tCO2. To give you an idea, a household that consumes 20 MWh of natural gas for heating (payment of around CZK 40,000/year) produces approximately 4 tCO2 per year. We can therefore start with payments for emission allowances of around CZK 1,000/year, but at EUR 100/tCO2, payments will reach CZK 10,000/year. And with coal heating, the impact is almost twice as high!
The same situation applies to central heating plants, companies and their energy systems, and others. The only difference is that for a heating plant in a district town that heats 5,000 households and burns a combination of natural gas and coal, payments will, in the best case, be in the lower tens of millions of CZK in the long term, and in the worst case, they could easily reach hundreds of millions of CZK per year!
The solution is to prepare in advance for the impact of emission allowances on all operations. A suitable mix of low-emission sources, including electrification and the use of cheap off-peak electricity, leading to lower heat prices in combination with stable sources to maintain security of supply, is the basic principle of green heating. When connected to modern operation control, heating plants and heating stations can also form a key part of community energy systems, opening up further possibilities for modern energy.
Jan Hanus, CEO of ORGREZ ECO