About the EU's Emissions Trading Scheme
The EU’s Emissions Trading Scheme (EU ETS) is the world’s largest carbon market, covering more than 11,000 large scale industrial plants in the EU, as well as Iceland, Liechtenstein and Norway. The EU ETS covers about 40% of the EU’s greenhouse gas emissions, including energy companies, steel and cement plants, as well as intra-EU flights.
The EU ETS sets a limit on the amount of greenhouse gas emissions that can be emitted. Companies covered by the EU ETS receive or buy pollution permits – called EU Allowances -- one EU allowance allows for one tonne of CO2 to be emitted. The cap becomes slightly more stringent every year so that total emissions decline over time to minus 21% in 2020 and to minus 43% in 2030 from 2005 levels.
The ETS aims to help the EU achieve its emissions goals more cost-effectively. Moreover, the EU ETS is supposed to catalyze investments in energy-efficiency and renewable technologies. However, the EU ETS has failed to drive such climate friendly investment and here is why:
If a company has spare permits it can keep them to cover its future needs or sell them to another company. Instead of buying allowances, companies can also buy much cheaper carbon offsets from the Clean Development Mechanism and Joint Implementation. This despite the fact that evidence shows that a majority of these offsets do not represent real emissions reductions. The use of these offsets together with a weak target and the economic recession have made the EU ETS ineffective.
A gigantic surplus of more than 2.1 billion spare pollution permits (EU allowances) has built up. This is more than all companies participating in the ETS are allowed to emit in one year. By 2020, the EU ETS surplus will have grown to between 2.6 and 4.5 billion allowances. As a result, the price for allowances has dropped so significantly that the EU ETS no longer facilitates the transition towards a renewable and energy efficient economy, and companies can delay or cancel investments in cleaner and more efficient production, risking a costly lock-in in carbon intensive infrastructure for years to come.
An overhaul of the EU ETS is urgently needed. Otherwise Europe risks a costly lock-in in fossil fuels for years to come:
• The road to EU ETS reform starts with the Market Stability Reserve (read more in the "MSR" section)
• ETS after 2020: The reforms we need to see (read more in the "ETS after 2020" section)
The low price of pollution permits has allowed coal use in Europe to remain stubbornly high. To reverse this trend and rapidly phase out coal, advocacy work against new coal plants and political lobbying for a range of policy measures that stop subsidizing coal and catalyze energy efficiency and renewable energy are needed. (link to coal section)
The EU ETS has long been hailed as the cornerstone of the EU’s efforts to tackle climate change. Failure to implement effective policy reforms will compromise the EU’s ability to be a global leader on climate issues and may diminish its influence in international climate negotiations leading to a new global climate agreement to be signed in Paris end of this year.