The Mandated Emission Trading Systems Market has been One of Spain’s Main Drivers of Emissions Reduction

Currently, there are two complementary carbon emissions trading systems in Spain: the mandatory regulated market and the voluntary market. They are very different; their only similarity is that they auction the same thing: one ton of carbon equivalent (tCO₂e), with significant divergences in their objectives and operation. Undoubtedly, the mandatory regulated market has been the most effective system so far in reducing greenhouse gas emissions.

  1. The voluntary carbon market

As its name implies, it responds to a particular and voluntary choice of governments, companies, or individuals who can buy or sell what is known as “carbon credits.” It is a transferable instrument, certified by private entities, representing one tCO2e that a project either avoids or reduces compared to a baseline – such as deforestation prevention, promotion of renewable energies, and energy efficiency – or absorption from the atmosphere – through reforestation (natural sinks) and carbon capture and storage activities (technological sinks).

For a project to generate credits, it must be certified with a recognized standard that ensures its quality and prevents double counting. Unlike the regulated market, which trades emission rights with identical prices and contractual aspects, credits can vary significantly in terms of project type, location, co-benefits, and other factors, so buyers must ensure that credits meet high-quality standards. However, there is no unified global system for these credits, as there are several independent markets and different standards. Its main problem is the lack of standards and guarantees of quality and security when buying and trading. There is an excellent debate due to the lack of clarity and international consensus on carbon credits.

When a company claims to be Net Zero, it is often unclear whether this includes only its direct or indirect emissions from its value chain. Moreover, it is difficult to determine if the credits it uses are for avoiding or eliminating emissions and if these eliminations are short or long-term. For example, in the voluntary market, one ton of avoided carbon and one ton of eliminated carbon may weigh the same so that a company can be considered Net Zero. However, it has nothing to do with avoiding one tCO₂e versus eliminating it.

Although the voluntary carbon market has been in operation for several decades, it has not experienced significant growth until recent years in Spain. The price of one equivalent tCO₂e, although generally around 10 euros, fluctuates greatly, from 1 to 2,000 euros, depending on the type of project. The highest prices correspond to biodiversity conservation projects. Regarding volume, during 2019-2021, credit issuance increased by 116% and demand by 130%, mainly driven by growing and ambitious decarbonization targets proposed for 2030.

  1. The emissions trading market (mandatory regulated market)

Spain is included in the European Union Emissions Trading System (EU ETS), which is the European Union’s (EU) primary tool for regulating greenhouse gas (GHG) emissions in all states of the European Economic Area. Regulated GHGs are carbon dioxide (CO2), nitrous oxide (N2O), and some perfluorocarbons (CF4 and C2F6). The total mandatory carbon market in the European Union includes over 10,500 stationary installations and nearly 500 aviation operators, whose GHG emissions account for around 40% of the total emitted in participating countries. The EU ETS is currently the world’s most extensive system by market value and revenue, with a value of around 770 billion euros last year, 2% more than in 2022 and 87% of the global total, according to a 2024 London Stock Exchange Group report.

The EU ETS was established in 2003 through Directive 2003/87/EC, which set out the basic rules for emissions trading in the European Union. Accurate and strict monitoring, reporting, and verification of GHG emissions are essential elements in any emissions trading regime because they allow for the precise determination of the quality and quantity of emission allowances to be surrendered. Ensuring emissions do not occur outside the surrender obligation is impossible without a rigorous system. In Spain, regional governments carry out this monitoring, affecting nearly 970 installations and about 30 aviation operators, accounting for about 40% of the total national emissions of all GHGs. Each installation must annually submit to the Spanish government (in its autonomous community) an emissions annual report (EAA) endorsed by an accredited private verifier. Verifier accreditation in Spain is carried out by the National Accreditation Entity (ENAC).

Auctioning is the current allocation method of emission allowances in the EU ETS. The principles of freedom of competition, publicity, transparency, non-discrimination, and efficiency govern auctions. Revenues are distributed among the Member States in accordance with criteria set out in Article 10 of Directive 2003/87/EC. All revenues (except those earmarked for the compensation of indirect costs and those deriving from the European Commission’s resources) must be directed toward the fight against climate change.

In Spain, this system has been gradually implemented in four phases:

In Phases I and II (2005-2012) of the EU ETS, auctions were a residual method for introducing emission allowances to the market. Most Member States did not conduct auctions. Additionally, the economic crisis reduced activity, leading to decreased GHG emissions and decreased demand for emission allowances. This resulted in the collapse of the emission allowance price, which disincentivized emission reduction.

Phase III (2013-2020) brought changes to strengthen the system, establishing auctions as the primary allocation method, harmonizing the system among EU member states, improving allocation rules, and eliminating free allocation to electricity generation.

In Phase IV (2021-2030), Commission Delegated Regulation (EU) 2023/2830 of 17 October 2023 entered into force, expanding the economic sectors participating in the carbon market and making its management and other aspects of GHG emission allowance auctions more comprehensive and strict. For example, in addition to allowances for installations and aviation operators, the auction was expanded to include new sectors corresponding to maritime transport, road transport, and buildings. Auctions are conducted independently.

Spain, along with other EU countries, auctions its allowances on a common platform, which is bid for in periods. Currently, the European Energy Exchange (EEX) manages the common platform. Auctions are conducted through a single-round, sealed-bid, uniform-price format.

The common platform conducts auctions every Monday, Tuesday, and Thursday. Supervision of auctions is carried out by the European Commission and entities responsible for supervising financial instrument markets: the European Securities and Markets Authority (ESMA) in the case of the EU and national bodies such as the National Securities Market Commission (CNMV) for Spain. The price of one tCO₂e in the EU ETS is around 100 euros, the highest of all ETS currently in existence.

Emissions trading significantly contributes to the EU’s goal of reducing GHG emissions by 62% by 2030 compared to 2005 levels. The EU ETS is a critical element of the EU’s climate policy and a vital tool for reducing greenhouse gas emissions cost-effectively. Since its inception, EU emissions have decreased by 41%. In Spain, the EU ETS carbon market has been one of the main drivers contributing so far to a 25% reduction in GHG emissions, along with renewable energies, which it has also helped finance with its revenues.

This Post was submitted by Climate Scorecard Spain Country Manager Juanjo Santos.


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