The 1990s saw the first attempt of the EU to introduce a carbon tax. Strong industrial lobbying led to its failure. In 2005, EU succeeded to negotiate and introduce an alternative to a carbon tax known under the European Union Emissions Trading Systems or EU ETS.
EU ETS follows the ‘cap and trade’ principle. It sets a maximum cap on the total amount of greenhouse gases that can be emitted by all installations which are participating. Allowances are auctioned off or allocated for free and can be traded. Each participating actor is responsible for monitoring and reporting on their emissions to their respective authority. Each Member State has established a registry to which participating actors report on their emissions by 31 March of each year. Within the following year, the data received is being verified by an accredited verifier pursuant to Directive 2003/87/EC. An accredited verifier could be a national body established by a national government and may have the authority to conduct verifications in other Member States in addition to the national country. In the case of an excess to the allowed emission cap, a purchase of allowance from another actor(s) is required.
Since its inception, EU ETS has had three distinctive phases. The first phase was between 2005 and 2007. It included more than 12,000 participating organizations. The main criteria for participating was the amount of combustion installations with a rated thermal input exceeding 20MW. This represented approximately 40% of EU CO2 emissions. Prices of carbon allowance were unstable during the first phase of operations, starting from EUR 30 per ton CO2 in 2006 and reaching almost zero by the end of 2007. The ‘Learning by Doing’ phase was heavily criticized; national governments were accused of abusing the system and net emissions increased by 1.9%.
The second phase (2008-2012) saw a significant expansion of the scope of the scheme. Norway, Iceland, and Liechtenstein joined the market. It also saw an expansion of the sectors covered by the scheme by introducing the aviation sector. The price of carbon increased during the first half of phase II reaching EUR 20 per ton CO2. However, the recession and market perception of future fossil fuel prices tending to go downwards had pushed the price of carbon downward. The Economist described the EU ETS as too weak to provide incentives for firms to reduce emissions given the low prices and an oversupply of permits.
For phase three (2013-2020), the European Commission (EC) introduced a number of changes which set an overall EU cap with allowances allocated to EU Member States, tighter limits on the use of offsets, a move from allowances to auctioning and the inclusion of more sectors and gases. Prices remained low, fluctuating between EUR 6.20 and EUR 6.40.
Currently, the system covers (i) carbon dioxide emissions from power and heat generation, energy-intensive industry sectors such as oil refineries, steel, iron, aluminium, metal cement, lime, glass, ceramics and chemicals and commercial aviation; (ii) nitrous oxide from the production of nitric, adipic and glyoxal; and (iii) perfluorocarbons from aluminium production.
Activity Rating: ** Standing Still
The EU ETS has been criticized for several failings, including: over-allocation of permits, massive windfall profits for energy generator companies, price volatility, and in general for failing to meet its goals. In the first two phases, the market has been oversupplied with allocations; thus, reflecting the difficulty in predicting future emissions which is necessary in setting a cap.
Being the world’s first international emissions trading system, the EU is applying the concept of learning by doing. The lack of adequate infrastructure and ability to predict market behaviors led to an increase of EU gas emissions, especially during the first two phases. However, the European Commission is regularly analyzing the system and its effectiveness and proposes new amendments and changes in order to overcome shortfalls and mitigate future risks. In response to criticism and in order to create a more efficient environment for carbon emission trading, the EC is planning to complete a review of the existing system and to propose further amendments and changes to the current system. The EC is preparing for phase four (2021-2031) with the aim of strengthening the EU ETS as an investment driver and to reinforce market stability, while maintaining a decrease in EU carbon emission in total.
The EU seems keen to make the system work and succeed. But the central question lies in its ability to provide proper incentives to industries to reduce their emissions and to create an effective environment where all current actors are cooperating. Reducing caps and tightening allocations may not be the most effective tools to use as it may lead to the retreat of small and weak actors from the market; while large powerful actors who are the main polluters will remain on the scene and will dominate the ETS.
Dear Ms. Ursula von der Leyen,
We would like to express our concern regarding EU efforts to curb carbon gas emissions. While your proposed action shows the strong commitment of the EU to the Paris Agreement and to create a zero-emission economy in Europe, we are skeptical regarding the usefulness of current tools to achieve these goals. Until today, EU ETS proved its inability to be a main tool to reduce carbon gas emissions; on the contrary, gas emissions have been on the rise since its inception. We strongly encourage the EC to ensure that tools used in Phase IV are more effective and adapted to the current situation and market.
We are look forward to your response to this suggestion and working on climate action together.
With our Respectful and Best Regards,
Rue de la Loi / Wetstraat 200
This Post was submitted by Climate Scorecard EU Manager Ibrahim Abdel-Ati