Filenews 27 January 2024 - by Angelos Nicolaou
From 2027, with the inclusion of road transport, buildings and small industries in the Greenhouse Gas Emissions Trading System, the cost of fossil fuels for heating in buildings and for road transport is expected to increase significantly. As a result, additional costs are created for consumers. To this end, the Social Climate Fund was created to relieve the most vulnerable. At the same time, the Republic of Cyprus is taking steps to end the dependence of households, small and medium-sized enterprises and electricity production on fossil fuels.
The significant changes that affect everyone's pocket come with Cyprus' adaptation to the new greenhouse gas emission allowance trading system for buildings and road transport to achieve the 2030 climate targets under "Fit for 55". The Department of Environment is advancing in achieving the targets for reducing greenhouse gas emissions in the main sectors of the economy, while ensuring that the most vulnerable citizens and micro-enterprises, as well as sectors exposed to carbon leakage, will be effectively supported during the climate transition. Please note that the deadline for transposition of this Directive into national law is 30 June 2024.
The Greenhouse Gas Emission Allowance Trading System will incur costs to consumers (citizens, businesses, public sector) due to an increase in the retail price of liquid fuels in road transport, buildings and light industry. On the other hand, Cyprus will generate revenues from both the auctioning of emission allowances and its participation in the Social Climate Fund.
Based on preliminary allowance prices per year forecast by the European Commission as well as projections on the evolution of greenhouse gas emissions, a total burden on consumers of €409-415 million is expected. in the four-year period 2027-2030 and by €650-672 million. throughout the ETS implementation period, i.e. the six-year period 2027-2032. This total cost will come from the gradual increase in the retail price of liquid fuels. Based on the studies of the Cyprus Institute, it appears that, compared to the retail fuel prices prevailing in autumn 2023, due to the ETS, an increase of 5-15% in liquid fuels is expected towards the end of the decade, with a smaller percentage increase in the price of gasoline and LPG and a higher percentage increase in heating oil and fuel oil.
Based on the forecast in 2027 with a carbon dioxide allowance price of €25 and provided that the increase in retail fuel price follows the fixed prices of 2020, the price of gasoline will increase 6.8 cents, diesel and heating 8 cents, LPG 4.6 cents and fuel oil 8.6 cents. However, if the increase is taken based on future prices that include average annual inflation of 2-3%, then the increase in the price of gasoline will increase in 2027 by 8.5 cents, diesel and heating by 10.1 cents, LPG by 5.8 cents and fuel oil by 10.8 cents.
Provided that the projected evolution of the price of ETS allowances according to the European Commission will increase year on year, so will the effect of the carbon tax on retail fuel prices annually. The fee for 2028 is estimated at €40, in 2029 at €45 and in 2030 at €50.
According to scientific analysis, since the implementation of the ETS, households in the two lowest income categories (deciles) may suffer a reduction in their purchasing power by €90-€140 in the year 2030, or about 1-1.5% of their income. In high income categories, the corresponding decrease in purchasing power is expected to be higher in absolute terms but lower in relative terms of around €350-€400 or about 0.5% of their income.
It is noted that the buildings, road transport and small industries sectors are responsible for a very significant part of the country's total emissions, especially the road transport sector. Specifically, 79% come from road transport, 16% from the buildings sector and 5% from light industry.
For buildings, road transport and other sectors (mainly small industries) a new, separate emissions trading scheme is being introduced to ensure cost-effective emission reductions in these sectors, which have so far proved difficult to decarbonise. The new system will apply to distributors supplying fuel to the buildings, road transport and other sectors from 2027. A safeguard has been put in place so that, in case the price of oil and gas is exceptionally high in the period before the start of operation of the new system, its commissioning will be postponed until 2028.
Public presentation by the Department of Environment
The Department of Environment is proceeding with a public consultation of the harmonizing bill that is currently being processed by the Legal Service and at the same time is preparing for the public presentation that will take place on Wednesday, February 14, 2024. This amendment brings the transport and heating of buildings sector into the Emissions Trading System (ETS). The presentation will present the draft of the harmonizing Bill and the impact study prepared by the Cyprus Institute.
In this analysis, it is assumed that the cost of purchasing allowances will be fully passed on from fuel suppliers (who will purchase allowances) to final consumers. According to official figures, for every €10 carbon tax, there will be an increase in retail fuel prices and the cost of living. The surcharge will be 2.3 cents for gasoline, 2.7 cents for diesel and heating, 1.6 cents for LPG and 2.9 cents for fuel oil.
The increase in fuel prices due to ETS leads in two ways to a reduction in emissions from the use of these fuels. Firstly, by gradually reducing fuel consumption because it is becoming more expensive and secondly, by substituting fuels by other energy sources not affected by the ETS.
It is noted that the EU wants to ensure low allowance prices so that the increase in retail fuel prices is limited and thus avoid social reactions. Therefore, the Directive has provided for various mechanisms to equalise the prices of allowances in case prices rise sharply and also provides for a postponement of the implementation of the ETS by one year if prevailing energy prices in 2026 are "exceptionally high".
