This week, we provide an honest look at the ‘upstream’ regulatory mechanism and explain how its costs are designed to flow down to the end consumer, impacting everything from heating bills to transport expenses.
A Quick Refresher: The ‘Upstream’ System
As we have established, the ETS2 does not directly regulate homeowners, property managers, or individual drivers. Instead, it is designed as an ‘upstream’ system that targets fuel suppliers. These are the companies that produce and sell fossil fuels like natural gas, heating oil, petrol, and diesel. Under the new rules, these suppliers must purchase and surrender carbon allowances to cover the emissions generated from the fuel they place on the market.
This policy design is deliberate. By targeting a smaller number of upstream entities, the EU can create an efficient, market-wide carbon price without the administrative burden of regulating millions of individual consumers.
Tracing the Cost: From Supplier to Your Bill
While fuel suppliers are the entities legally required to comply with ETS2, they will not be the ones to absorb the full financial impact. The cost of purchasing carbon allowances becomes a new operational expense for these businesses. In any market, when a company’s production costs rise, that increase is typically incorporated into the final price of the product.
The ETS2 is no different. The cost of carbon allowances is widely expected to be passed on from the fuel suppliers to their customers. Think of it like any other tax or levy on a product you buy; it is factored into the price you pay at the point of sale.
For homeowners and property managers, this will translate directly into:
- Higher bills for heating systems that run on natural gas or heating oil.
- Increased costs for transport fuels like petrol and diesel.
This is not a separate ‘carbon tax’ that will appear on your bill, but rather an increase embedded within the price per litre of fuel or cubic metre of gas you purchase.
An Intended Consequence: The Incentive to Change
It is important to understand that this financial impact on consumers is not an unintended side effect; it is the central point of the policy. By making carbon-intensive fuels more expensive, ETS2 creates a powerful and direct financial incentive for everyone to reduce their consumption.
This is where you, as a property owner or manager, have agency. The system is designed to encourage proactive measures that can mitigate these rising costs. By investing in energy efficiency—such as improving insulation, upgrading to a heat pump, or installing renewable energy sources—you can reduce your building’s reliance on fossil fuels. In doing so, you directly lower your exposure to the carbon price and its effect on your energy bills.
So, who is really paying for ETS2? While suppliers write the cheque to the regulator, the financial burden is designed to be shared by all consumers of fossil fuels. The crucial takeaway is that you have the power to influence how much of that burden you will have to bear.
The good news is that support will be available. Next week, we will explore the Social Climate Fund, a key part of the ETS2 package designed to help vulnerable households and businesses invest in energy efficiency and navigate this transition.
