EU Emission Trading: 3 things you need to know about the flagship carbon pricing scheme
The European Union likes to pride itself with EU Emission Trading Scheme (ETS), the world’s first decarbonisation initiative that puts a price tag on pollution. Although the statistics are in ETS’s favour – showing a remarkable GHG decrease of 9% in ETS covered sectors in 2019 – the scheme is ripe for reform. Here’s everything you need to know about ETS and its forthcoming revision.
Fact 1: it is not as complicated as its name might suggest
ETS functions according to the logic of “cap and trade”: The ETS regulation sets a cap on the total amount of GHG emitted, and within this cap, companies in energy-intensive industries such as steel, construction and energy, can receive and buy emission allowances, which they can trade with one another as needed. The cap is reduced over time so that overall emissions from each sector fall. The underlying idea is that “the polluter pays”, while well-performing industries can generate extra revenue with the sale of allowances to worst-emitters.
Fact 2: aviation and shipping remain the EU’s problem children
In terms of aviation, the devil is in detail: while formally part of ETS, airlines have benefitted from over-allocation of permits, which allowed worst-emitters to purchase cheap ETC credits and continue to pollute at a small price. Let the numbers speak: while emissions in other ETS covered sectors such as power and steel fell sharply, aviation emissions grew by 1.5% in 2019. Although shipping emissions represent around 13% of the overall EU greenhouse gas, up until 2020, policy makers have turned a blind eye on the sector. However, the tide has now turned, and this September the European Parliament has voted in favour of the inclusion of shipping in the ETS.
Fact 3: ETS will be overhauled in 2021
The ETS framework was crafted in the early 2000s, when climate change was nowhere near the top of the EU’s agenda, and so it is understandable that the regulation requires steady revisions to deliver on the EU’s increasingly ambitious climate objectives. As announced in the EU Green Deal, ETS will be revised in June 2021 to align the scheme with the EU’s stricter GHG reduction target. It is also clear that ETS will be extended to new sectors, above all to shipping, but also other sectors like forestry and carbon capture industries are being considered.
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