Policy Recommendation # 1: Adopt Stronger Goals for the EU’s Market Stability Reserve Fund

Policy Recommendation # 2: Adopt a Phased-In Approach for Having the Aviation Industry Pay for the Allowances It Receives Under the Market Stability Reserve Fund

The European Union’s emissions trading system (ETS) is one of the primary mechanisms supporting the reduction of greenhouse gas (GHG) emissions in the EU. The EU ETS has been widely critiqued for not properly restricting the amount of emissions allowed in order to reduce GHG emissions by the amount needed to meet goals outlined by both the Paris Agreement and the European Green Deal. The EU ETS is currently structured so that there is an emissions cap or limit on the overall volume of greenhouse gases that can be emitted by power plants, factories, and other fixed installations. As a result, there are a limited number of emissions allowances that companies can receive or buy and trade as needed. With each allowance, the holder of the allowance is allowed to emit one tonne of carbon dioxide—or the equivalent of two other greenhouse gases: nitrous oxide and perfluorocarbons. There is also a separate cap that is calculated for the EU aviation sector. Allowances are allocated and auctioned specifically to aircraft operators and up until this year, airlines were able to choose to use either aviation or general EU emissions allowances for compliance. Starting this year, fixed installations are only allowed to use aviation allowances for their emissions.

Phase 3 of the EU ETS covered 2013-2020; in 2013, 2,084,301,856 allowances were permitted and each subsequent year the amount of allowances allowed decreased by a linear reduction factor of 1.74% (or approximately 38,264,246 allowances per year). Phase 4 of the EU ETS is beginning this year and will last until 2030. During phase 4, the cap on emissions will be subject to a linear reduction factor of 2.2%. The same linear reduction factor will also be applied to aviation allowances beginning this year. In order to meet the EU’s overall greenhouse gas emissions reduction target for 2030 of reducing emissions by 55% compared to 1990 levels, the sectors covered by the EU ETS will have to reduce their emissions by 43% compared to 2005 levels. Thus, the revised directive for Phase 4 has attempted to adjust the EU ETS in order to reach this goal. One way to achieve this is through the stated increase in the linear reduction factor of emissions allowed, as well as through the strengthening of the Market Stability Reserve, the setting aside of free allowances for new and growing installations, and the funding of low-carbon innovation. The Market Stability Reserve began operating in January 2019 and aims to address the current surplus of allowances and improve the system’s resilience to major shocks by adjusting the supply of allowances to be auctioned. Instead of auctioning off allowances that were not used in previous years, unallocated allowances are transferred to the reserve, and after 2023 allowances that are held in the Market Stability Reserve above the previous year’s auction volume will not be valid. Moreover, the EU’s Innovation Fund and Modernization Fund aims to support innovation in the carbon industry and the modernization of the power sector, which will increase energy efficiency and facilitate a just transition in carbon-dependent regions.

While Phase 4 of the EU ETS is promising in its ability to further reduce GHG emissions and address some of the shortcomings that it has been frequently critiqued for, it is essential that the EU ETS be further revised in order to achieve the ambitious goal of at least a 50% reduction in greenhouse gas emissions by 2030. The EU ETS is currently set up so that the EU will reach a 55% reduction in greenhouse gas emissions compared to 1990 levels by 2030, and, as a result, only slight modifications and efficient monitoring will need to take place in order for the EU to effectively decrease its emissions by 50%. A study performed by Patrick Bayer and Michaël Aklin found that the EU ETS has been successful in reducing emissions; between 2008-2016, the EU ETS saved more than 1 billion tons of carbon dioxide (a reduction of 3.8% of total EU-wide emissions compared to a world where the EU ETS was not enforced). Yet, the fact that the policy of the EU ETS only yielded such a small percentage of reductions shows how enforcing more strict caps will be necessary in order to achieve greater change. As of 1990, the EU produced 5660 million tonnes of CO₂ equivalents. Therefore, in order for the EU to reach a 50% decrease in emissions by the end of 10 years, the EU will have to produce 2830 MT of CO₂ equivalents in 2030. In 2018, the EU produced approximately 3737 MT of CO₂ equivalents; in order to achieve the necessary decrease of 907 MT from these levels by 2030, the EU ETS will need to be reformed further.

The EU ETS is fundamental in the EU’s climate change mitigation efforts because it provides a means to ensure that emissions are monitored and reduced in compliance with outlined goals. Through the allotment of a certain number of allowances, the EU is able to control the amount of emissions that occur in the sectors it presides over. Therefore, one way to ensure that the EU ETS is actually able to meet its current goals is the adoption of more ambitious goals pertaining to the Market Stability Reserve. Instead of waiting until 2023 to not permit allowances to be held in the Reserve above the previous year’s auction volume, the EU could enforce this now or in 2022. This would decrease the number of potential allowances used currently, yielding a larger decline in total emissions by 2030 given that the same linear reduction factor of 2.2% remained in place. One of the biggest critiques of the EU ETS is that it has set emissions reductions that are too low and has created too many allowances that will harm the system for many years to come. Adjusting the Market Stability Reserve policies in this way would could ameliorate this concern. Moreover, instead of choosing to allot 90% of allowances to EU Member States on the basis of their shared verified emissions and 10% of allowances to less wealthy EU Member States for the purpose of solidarity and growth, these percentages could be shifted so that a greater percentage of allowances are given to less wealthy EU Member States and less are given on the basis of shared verified emissions. This would give countries like Germany—who have ample financial potential and innovative capacity—a push to find alternative ways to decrease GHG emissions. The EU might consider encouraging countries to recognize the necessity of channeling more money to innovation and modification while also giving less financially well-off countries the extra money necessary to develop new sustainable technologies. Moreover, under the EU ETS, airlines have continued to receive a large amount of their allowances for free, which should also be reformed as a way to encourage the aviation industry to decrease their emissions. According to the Center for Biological Diversity, if left unchecked, global aviation will generate an estimated 43 metric gigatons of carbon dioxide emissions through 2050, so reform in the aviation industry will be beneficial in helping the EU to decrease its emissions by 55% by 2030.

Whether or not the EU ETS will be successful in its goal of playing a substantial role in the reduction of EU emissions will be apparent by looking at the number of allowances that are in place in 2030 and continuing to monitor whether member countries comply with their allowance requirements. A baseline that can be used to measure the success of the EU ETS is whether or not the total number of allowances and emissions actually decrease by the stated linear reduction factor of 2.2% each year. However, a potential obstacle for implementing the policy recommendations given here will be inadequate funding. A transformation that includes innovation and modification will have to be undergone in the EU in order to allow for such an ambitious decrease in emissions to occur. Since one of the proposed policy recommendations is not permitting allowances held in the Reserve above the previous year’s auction volume to be used to be enforced sooner, which will decrease the potential revenue that can be recycled back to EU environmental funds, it would be beneficial to garner additional funding. This could be done through the allotment of more money from the EU’s COVID-19 recovery fund (currently set at €1.8 trillion) towards the previously mentioned Innovation Fund and Modernization Fund or the Just Transition Fund. Moreover, since the aviation industry has suffered a large hit and loss of revenue due to COVID-19, it may be more difficult for the aviation industry to pay for allowances immediately instead of receiving them for free as they have been. Therefore, this suggestion could be phased in at some point within the next couple of years, in order to ensure that the aviation industry has ample time to recover from the COVID-19 crisis.

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Contact

Frans Timmermans, Executive Vice President of European Commission/Climate Action

Email: frans-timmermans-contact@ec.europa.eu

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Sources

Airplane Emissions, 2020, www.biologicaldiversity.org/programs/climate_law_institute/transportation_and_global_warming/airplane_emissions/.

Bayer, Patrick, and Michaël Aklin. “The European Union Emissions Trading System Reduced CO2 Emissions despite Low Prices.” Proceedings of the National Academy of Sciences, vol. 117, no. 16, 2020, pp. 8804–8812., doi:10.1073/pnas.1918128117.

“Emissions Cap and Allowances.” Climate Action – European Commission, 16 Feb. 2017, ec.europa.eu/clima/policies/ets/cap_en.

“Greenhouse Gas Emission Statistics – Emission Inventories.” Eurostat, 18 June 2020.

“Recovery Plan for Europe.” European Commission – European Commission, 4 Jan. 2021, ec.europa.eu/info/strategy/recovery-plan-europe_en.

“Revision for Phase 4 (2021-2030).” Climate Action – European Commission, 16 Feb. 2017, ec.europa.eu/clima/policies/ets/revision_en.

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This Post was submitted by Climate Scorecard EU Manager Brittany Diogenes

Image Courtesy of: https://www.energylivenews.com/2015/02/23/eu-ministers-urge-early-carbon-market-reform/