How can a reformed Emissions Trading System help to reach EU Green Deal targets?
Just over a year ago, Europe declared its aim of becoming the first climate-neutral continent, by 2050. The EU Green Deal is the plan that will help Europe get there and achieve sustainable growth. The EU institutions have agreed upon an ambitious target as part of this plan, to decrease CO2 emissions in the EU by 55% by 2030, compared with 1990 levels. The 2030 target is a clear step up from initial goals to reduce CO2 emissions by just 40%. A 55% target or more will certainly require efforts from all sectors of the EU economy to make this a reality.
Where does the EU Emissions Trading System (EU ETS) come in?
The EU ETS plays an important role in the EU’s policies combatting climate change and regulates CO2 emissions of the most emission intensive sectors in the EU, accounting for almost 50% of the EU’s greenhouse gas emissions.
Based on a fixed and annually decreasing number of allowances, market players in the power and heat sector as well as energy intensive industries, source emission allowances through auctions, bilateral trade or allocations to comply with the ETS. The current configuration of the ETS sets out the framework until the end of the fourth trading phase in 2030 and is currently undergoing a review. The EC is expected to propose specific reforms for the market design of the current trading phase as part of the “fit-for-55" climate package over the summer of 2021.
Reforming the EU ETS to meet Green Deal targets
Frontier Economics was commissioned by EnBW to analyse different options to reform the EU ETS in order bring the supply of allowances in line with the ambitions of the EU Green Deal. Our study concludes that:
- A significant market surplus of allowances would build up if the EU ETS was not reformed;
- A rebasing of the ETS cap in 2025 by 200 mn. tCO2 and a linear reduction factor (LRF) of 3,8% would bring the ETS in line with a Green Deal target of -55%; without rebasing, the LRF needs to increase from 2.2% currently to 5.5% in 2025.
- Higher ambitions and a tightening of supply will lead to increasing prices of allowances
- In order to avoid competitive disadvantages for EU industry, the current framework to prevent carbon leakage also needs to be revisited.
You can read more about our findings here, in our study for EnBW.
Frontier regularly advises clients on EU energy policy and the green energy transition. For more information, please contact email@example.com or call +44 (0) 20 7031 7000.