The EU Emissions Trading System (EU ETS)

“The EU ETS is the largest multi-country, multi-sector greenhouse gas emissions trading system in the world.” – Gov.uk

Included within this system is over 11,000 power-stations and industrial plants across the EU – with 1,000 or so of these within the UK itself. These are not limited to one specific industry – the list includes power-stations, offshore oil platforms, iron and steel producers, oil refineries, and chemical producers. All of these industries are known for having incredibly high energy-demands.

Other companies may also be included in this list that don’t belong to these industries. Organisations and companies are usually included based upon the combustion capacity of equipment at their business site.

How does the EU ETS work?

EU ETS works on the fundamental basis of ‘cap and trade’. There is a limit placed on the total greenhouse gas emissions allowed for participants within the EU ETS. This cap is then converted into tradeable permits (credits) that can be thought of as ‘tradeable allowances’.

These credits are allocated to members in the market through a mix of allocation and auctions. Those entities who give off higher emissions than others will now have more of a financial burden to purchase more credits, to cover off their higher emission numbers. Those who’s emissions are below their allocation are free to sell on their credits – receiving monetary compensation for being emission-friendly. This system effectively punishes those who’s emissions are too high, and rewards those who come in under the limit.

All companies covered by EU ETS are required to report and monitor their emissions every year – surrendering any emission allowances to cover annual emissions. This data helps the cap level to be calculated as accurately as possible.

Over-time, the cap is gradually reduced. Taking into account new research, technology, good practice, and previous emissions data to set a smaller limit year after year. This falling cap should lead to a fall in total emissions year upon year.

Has the EU ETS been a success?

This is up for debate still. Some traditional economists argue against the efficacy of the system.

However, data from ec.europa.eu shows that between 2005 and 2019 that emissions have fallen by 35% across all installations covered by the system.

More recently, the Market Stability Reserve was introduced in 2019. This has helped contribute to a higher and more stable carbon price (some of the things that traditional economists disliked). Since this was introduced – emissions have fallen by 9% in 2019, with reductions of 14.9% and 1.9% from electricity and heat production, and industry emissions respectively. The amount of carbon credits supplied each year are planned to be reduced annually, also.

Where does the EU ETS go from here?

The European Green Deal was presented in September 2020 – which included an impact-assessed plan to further improve on the emission reductions already made. By 2030, greenhouse gas emissions will be moved to at least a target of 55% in reduction. Further proposals will be made in June of this year regarding the legal side of things – so keep an eye out for any further developments.

How does this effect the energy industry?

Energy producers across Europe are some of the biggest customers for carbon credits. As they release huge-emissions in trying to produce energy for the millions of homes and businesses that need it, they need to purchase the necessary amount of carbon credits.

As we have already covered in the previous sections – total carbon credit allowances are planned to fall year after year. This, combined with rising energy demand across Europe, will create an incredibly tight squeeze on energy producers.

As the market cap is designed to be reduced year after year, this is a slow but observable reduction in the total supp

Differences in desires – how will this affect the system?

ActionComment
President Macron has called for a serious rise in costs.France has further implemented a fixed carbon tax of €44/mt for petroleum products, set to rise to €84/mt in 2022.
Germany is still hugely reliant on coal.Germany is still dependant on coal as an energy source, which a higher ETS would punish disproportionately.
The UK has left the EU.The UK has left the EU and since started their own carbon trading system.
The Paris Agreement may triple prices.A study from carbon tracker estimates that prices could triple if they are to use the EU ETS to hit Paris Agreement targets.
European coal production looks bleak.New prices for carbon look set to end coal production across Europe.
Diversity within the EU.There are different member states all pushing and pulling for different things.

The biggest thing to understand is that the EU ETS is subject to more external pressure than is immediately evident. Here are a few things to think about, which have pros and cons attached to all of them.

As you can see – each member state of the EU will push and/or pull in the direction that best suits their countries interest. France, an incredibly wealthy nation, have self-imposed further carbon taxes. Compare this to Germany who still source a huge amount of their energy from coal (high emissions) and who look set to take a huge hit from higher ETS prices.

The EU ETS is certainly not isolated from the political sphere either – with the withdrawal of the UK from the EU, it shows how exposed the scheme can be left. How will the trading system cope with the sudden removal of 1,000 customers?

This table is by no means inclusive of all commentary surrounding EU ETS – but it is a start. It is important to be able to critically think about the mechanisms we take for granted around us. By being able to understand how and why some of the factors influence the EU ETS in the way that they do

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