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European Union Emissions Trading System

January 01, 1970

The European Union Emissions Trading System (EU ETS) is a carbon emission trading scheme (or cap and trade scheme) which began in 2005 and is intended to lower greenhouse gas emissions by the European Union countries. Cap and trade schemes limit emissions of specified pollutants over an area and allow companies to trade emissions rights within that area. The EU ETS covers around 45% of the EU's greenhouse gas emissions.[1]

Price of CO2 in the EU Emissions Trading System
Price of CO2 in the EU Emissions Trading System

The scheme has been divided into four "trading periods". The first ETS trading period lasted three years, from January 2005 to December 2007. The second trading period ran from January 2008 until December 2012, coinciding with the first commitment period of the Kyoto Protocol. The third trading period lasted from January 2013 to December 2020. Compared to 2005, when the EU ETS was first implemented, the proposed caps for 2020 represents a 21% reduction of greenhouse gases. This target has been reached six years early as emissions in the ETS fell to 1.812 billion (109) tonnes in 2014.[2]

The fourth phase started in January 2021 and will continue until December 2030. The emission reductions to be achieved over this period are unclear as of November 2021, as the European Green Deal necessitates tightening of the current EU ETS reduction target for 2030 of −43% with respect to 2005. The EU commission proposes in its "Fit for 55" package to increase the EU ETS reduction target for 2030 to −61% compared to 2005.[3][4]

EU countries view the emissions trading scheme as necessary to meeting climate goals. A strong carbon market guides investors and industry in their transition from fossil fuels.[5] A 2020 study found that the EU ETS successfully reduced CO2 emissions even though the prices for carbon were set at low prices.[6] A 2023 study on the effects of the EU ETS identified a reduction in carbon emissions in the order of -10% between 2005 and 2012 with no impacts on profits or employment for regulated firms.[7] The price of EU allowances exceeded 100€/tCO2 ($118) in February 2023.[5]

Setup edit

 
European allowance prices from 2009

The EU Emission Trading System follows the cap and trade model where one allowance permits the holder to emit 1 ton of CO2 (tCO2). Under this scheme, a maximum (cap) is set on the total amount of greenhouse gases that can be emitted by all participating installations. EU Allowances for emissions are then auctioned off or allocated for free, and can subsequently be traded. Installations must monitor and report their CO2 emissions, ensuring they hand in enough allowances to the authorities to cover their emissions. In order to exceed its emissions allowance, an installation must purchase allowances from others. Conversely, if an installation emits less than its allowance, it can sell its leftover credits. This allows the system to find the most cost-effective ways of reducing emissions without significant government intervention.[citation needed]

The scheme was said to cover energy and heat generation industries and around 11,186 plants participated in the first stage. These plants only accounted for 45% of all European emissions at the time. More than 90% of all these allowances were free of cost in both periods to build a strong base of abatements for the future phases.[8] This free allocation resulted in the volume and value of allowances growing three-fold over 2006 with the price moving from €19/tCO2 in 2005 to its peak of €30/tCO2[9] which revealed a new problem. The overallocation of allowances caused the price to drop to €1/tCO2 in the first few months of 2007 which created market price instabilities for businesses to reinvest in low carbon technologies.

The European Union Emission Trading Scheme (or EU-ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world. After voluntary trials in the UK and Denmark, Phase I began operation in January 2005 with all 15 member states of the European Union participating.[10] The program caps the amount of carbon dioxide that can be emitted from large installations with a net heat supply in excess of 20 MW, such as power plants and carbon intensive factories,[11] and covers almost half (46%) of the EU's Carbon Dioxide emissions.[12] Phase I permits participants to trade among themselves and in validated credits from the developing world through Kyoto's Clean Development Mechanism. Credits are gained by investing in clean technologies and low-carbon solutions, and by certain types of emission-saving projects around the world to cover a proportion of their emissions.[13]

History edit

The EU-ETS was the first large greenhouse gas emissions trading scheme in the world.[14] It was launched in 2005 to fight global warming and is a major pillar of EU energy policy.[15] As of 2013, the EU ETS covers more than 11,000 factories, power stations, and other installations with a net heat excess of 20 MW in 31 countries—all 27 EU member states plus Iceland, Norway, Liechtenstein and United Kingdom.[16] In 2008, the installations regulated by the EU ETS were collectively responsible for close to half of the EU's anthropogenic emissions of CO2 and 40% of its total greenhouse gas emissions.[17][18] The EU had set a target for 2020 to cut greenhouse gas emissions by 20% compared with 1990, to reduce energy consumption by 20% compared to the 2007 baseline scenario, and to achieve a 20% share of gross final energy consumption from renewable energy sources—all of which was achieved.[19] A 2020 study estimated that the EU ETS had reduced CO2 emissions by more than 1 billion tons between 2008 and 2016 or 3.8% of total EU-wide emissions.[20]

The EU ETS has seen a number of significant changes, with the first trading period described as a "learning by doing" phase.[21] Phase III saw a turn to auctioning more permits rather than allocating freely (in 2013, over 40% of the allowances were auctioned[22]); harmonisation of rules for the remaining allocations; and the inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons.[18] In 2012, the EU ETS was also extended to the airline industry, though this only applies within the EEA.[23][24][25] The price of EU ETS carbon credits has been lower than intended, with a large surplus of allowances, in part because of the impact of the recent economic crisis on demand.[26] In 2012, the Commission said it would delay the auctioning of some allowances.[26] In 2015, the EU passed the decision (EU) 2015/1814[27] to establish a Market Stability Reserve that adjusts the annual supply of CO2 permits based on the CO2 permits in circulation in the previous year.[28][29] In 2018, the Market Stability Reserve was amended by Directive (EU) 2018/410[30] so that a certain amount of permits inside the reserve would be cancelled from 2023 onwards.

In January 2008, Norway, Iceland, and Liechtenstein joined the European Union Emissions Trading System (EU-ETS).[31] The Norwegian Ministry of the Environment has also released its draft National Allocation Plan which provides a carbon cap-and-trade of 15 million tonnes of CO2, 8 million of which are set to be auctioned.[32] According to the OECD Economic Survey of Norway 2010, the nation "has announced a target for 2008–12 10% below its commitment under the Kyoto Protocol and a 30% cut compared with 1990 by 2020."[33] In 2012, EU-15 emissions was 15.1% below their base year level. Based on figures for 2012 by the European Environment Agency, EU-15 emissions averaged 11.8% below base-year levels during the 2008–2012 period. This means the EU-15 over-achieved its first Kyoto target by a wide margin.[34]

Mechanisms edit

The first phase of EU ETS was created to operate apart from international climate change treaties such as the pre-existing United Nations Framework Convention on Climate Change (UNFCCC, 1992) or the Kyoto Protocol that was subsequently (1997) established under it. When the Kyoto Protocol came into force on 16 February 2005, Phase I of the EU ETS had already become operational. The EU later agreed to incorporate Kyoto flexible mechanism certificates as compliance tools within the EU ETS. The "Linking Directive" allows operators to use a certain amount of Kyoto certificates from flexible mechanism projects to cover their emissions.

The Kyoto flexible mechanisms are:

  • Joint Implementation projects (JI) defined by Article 6 of the Kyoto Protocol, which produce Emission Reduction Units (ERUs). One ERU represents the successful emissions reduction equivalent to one tonne of carbon dioxide equivalent (tCO2e).
  • the Clean Development Mechanism (CDM) defined by Article 12, which produces Certified Emission Reductions (CERs). One CER represents the successful emissions reduction equivalent to one tonne of carbon dioxide equivalent (tCO2e).
  • International Emissions Trading (IET) defined by Article 17.

IET is relevant as the reductions achieved through CDM projects are a compliance tool for EU ETS operators. These Certified Emission Reductions (CERs) can be obtained by implementing emission reduction projects in developing countries, outside the EU, that have ratified (or acceded to) the Kyoto Protocol. The implementation of Clean Development Projects is largely specified by the Marrakech Accords, a follow-on set of agreements by the Conference of the Parties to the Kyoto Protocol. The legislators of the EU ETS drew up the scheme independently but called on the experiences gained during the running of the voluntary UK Emissions Trading Scheme in the previous years,[35] and collaborated with other parties to ensure its units and mechanisms were compatible with the design agreed through the UNFCCC.

Under the EU ETS, the governments of the EU Member States agree on national emission caps which have to be approved by the EU commission. Those countries then allocate allowances to their industrial operators, and track and validate the actual emissions in accordance with the relevant assigned amount. They require the allowances to be retired after the end of each year.

The operators within the ETS may reassign or trade their allowances by several means:

  • privately, moving allowances between operators within a company and across national borders
  • over the counter, using a broker to privately match buyers and sellers
  • trading on the spot market of one of Europe's climate exchanges

Like any other financial instrument, trading consists of matching buyers and sellers between members of the exchange and then settling by depositing a valid allowance in exchange for the agreed financial consideration. Much like a stock market, companies and private individuals can trade through brokers who are listed on the exchange, and need not be regulated operators.

When each change of ownership of an allowance is proposed, the national Emissions Trading Registry and the European Commission are informed in order for them to validate the transaction. During Phase II of the EU ETS, the UNFCCC also validates the allowance and any change that alters the distribution within each national allocation plan.[36]: 11 

Like the Kyoto trading scheme, EU ETS allows a regulated operator to use carbon credits in the form of Emission Reduction Units (ERU) to comply with its obligations. A Kyoto Certified Emission Reduction unit (CER), produced by a carbon project that has been certified by the UNFCCC Clean Development Mechanism Executive Board, or Emission Reduction Unit (ERU) certified by the Joint Implementation project's host country or by the Joint Implementation Supervisory Committee, are accepted by the EU as equivalent.

Thus one EU Allowance Unit of one tonne of CO2, or "EUA", was designed to be identical ("fungible") with the equivalent "assigned amount units" (AAU) of CO2 defined under Kyoto. Hence, because of the EU decision to accept Kyoto-CERs as equivalent to EU-EUAs, it is possible to trade EUAs and UNFCCC-validated CERs on a one-to-one basis within the same system. (However, the EU was not able to link trades from all its countries until 2008-9 because of its technical problems connecting to the UN systems).[37]

During Phase II of the EU ETS, the operators within each Member State must surrender their allowances for inspection by the EU before they can be "retired" by the UNFCCC.

Allocation edit

The total number of permits issued (either auctioned or allocated) determines the supply for the allowances. The actual price is determined by the market. Too many allowances compared to demand will result in a low carbon price, and reduced emission abatement efforts.[38] Too few allowances will result in a high carbon price.[39]

For each EU ETS Phase, the total quantity to be allocated by each Member State is defined in the National Allocation Plan (equivalent to its UNFCCC-defined carbon account). The European Commission has oversight of the NAP process and decides if the NAP fulfills the twelve criteria set out in the Annex III of the Emission Trading Directive (EU Directive 2003/87/EC). The first and foremost criterion is that the proposed total quantity is in line with a Member State's Kyoto target.

Of course, the Member State's plan can, and should, also take account of emission levels in other sectors not covered by the EU ETS, and address these within its own domestic policies. For instance, transport is responsible for 21% of EU greenhouse gas emissions, households, and small businesses for 17% and agriculture for 10%.[40]

During Phase I, most allowances in all countries were given freely (known as grandfathering). This approach has been criticized[41] as giving rise to windfall profits, being less efficient than auctioning, and providing too little incentive for innovative new competition to provide clean, renewable energy.[42][43] On the other hand, allocation rather than auctioning may be justified for a few sectors that face international competition like the aluminium and steel industries.[44][45]

To address these problems,[citation needed] the European Commission proposed various changes in a January 2008 package, including the abolishment of NAPs from 2013 and auctioning a far greater share (ca. 60% in 2013, growing afterward) of emission permits.

From the start of Phase III (January 2013) there will be a centralized allocation of permits, not National Allocation Plans, with a greater share of auctioning of permits.[46]

Competitiveness edit

Allocation can act as a means of addressing concerns over loss of competitiveness, and possible "leakage" (carbon leakage) of emissions outside the EU. Leakage is the effect of emissions increasing in countries or sectors that have weaker regulation of emissions than the regulation in another country or sector.[47] Such concerns affect the following sectors: cement, steel, aluminium, pulp and paper, basic inorganic chemicals and fertilisers/ammonia.[45] Leakage from these sectors was thought to be under 1% of total EU emissions. Correcting for leakage by allocating permits acts as a temporary subsidy for affected industries, but does not fix the underlying problem. Border adjustments would be the economically efficient choice, where imports are taxed according to their carbon content.[38][44] One problem with border adjustments is that they might be used as a disguise for trade protectionism.[48] Some adjustments may also not prevent emissions leakage.

Banking and borrowing edit

Within a certain trading period, banking and borrowing is allowed. For example, a 2006 EUA can be used in 2007 (banking) or in 2005 (borrowing). Interperiod borrowing is not allowed. Member states had the discretion to decide whether banking EUAs from Phase I to Phase II was allowed.[49]

Members edit

  Participant countries in the EU ETS.
  The UK, a participant until 31 December 2020.
  The Swiss ETS, linked to the EU ETS since 1 January 2020.

The EU ETS operates in 30 countries: the 27 EU member states plus Iceland, Liechtenstein and Norway.[50]

The United Kingdom left the EU on 31 January 2020 but remained subject to EU rules until 31 December 2020. The UK Emissions Trading Scheme (UK ETS) replaced the UK's participation in the EU ETS on 1 January 2021,[51] but the UK government required organisations to continue to comply with their existing obligations under the 2020 scheme year, which ended on 30 April 2021.[52]

Linking edit

The EU ETS is linked to the Swiss Emissions Trading System [de] since 1 January 2020.[53] Linking systems creates a larger carbon market, which can reduce overall compliance costs, increase market liquidity and generate a more stable carbon market.[54][55] Linking systems can also be politically symbolic as it shows willingness to undertake a common effort to reduce GHG emissions.[56] Some scholars have argued that linking may provide a starting point for developing a new, bottom-up international climate policy architecture whereby multiple unique systems successively link their various systems.[57][58][59]

Phase I 2005–2007 edit

In the first phase (2005–2007), the EU ETS included some 12,000 installations, representing approximately 40% of EU CO2 emissions, covering energy activities (combustion installations with a rated thermal input exceeding 20 MW, mineral oil refineries, coke ovens), production and processing of ferrous metals, mineral industry (cement clinker, glass and ceramic bricks) and pulp, paper and board activities.[60]

Launch and operation edit

The ETS, in which all 15 Member States that were then members of the European Union participated, nominally commenced operation on 1 January 2005, although national registries were unable to settle transactions for the first few months. However, the prior existence of the UK Emissions Trading Scheme meant that market participants were already in place and ready. In its first year, 362 million tonnes of CO2 were traded on the market for a sum of €7.2 billion, and a large number of futures and options.[61]

Prices edit

The price of allowances increased more or less steadily to a peak level in April 2006 of about €30 per tonne CO2.[62] In late April 2006, a number of EU countries (the Netherlands, the Czech Republic, Belgium, France, and Spain) announced that their verified (or actual) emissions were less than the number of allowances allocated to installations. The spot price for EU allowances dropped 54% from €29.20 to €13.35 in the last week of April 2006. In May 2006, the European Commission confirmed that verified CO2 emissions were about 80 million tonnes or 4% lower than the number of allowances distributed to installations for 2005 emissions.[63] In May 2006, prices fell to under €10/tonne. Lack of scarcity under the first phase of the system continued through 2006 resulting in a trading price of €1.2 per tonne in March 2007, declining to €0.10 in September 2007. In 2007, carbon prices for the trial phase dropped to near zero for most of the year. Meanwhile, prices for Phase II remained significantly higher throughout, reflecting the fact that allowances for the trial phase were set to expire by 31 December 2007.[64]

Verified emissions edit

Verified emissions showed a net increase over the first phase of the scheme. For the countries for which data was available, emissions increased by 1.9% between 2005 and 2007 (at the time all 27 member states minus Romania, Bulgaria, and Malta).

Country Verified emissions Change
2005 2006 2007 2005–2007
  Austria 33,372,826 32,382,804 31,751,165 −4.9%
  Belgium 55,363,223 54,775,314 52,795,318 −4.6%
  Cyprus 5,078,877 5,259,273 5,396,164 6.2%
  Czech Republic 82,454,618 83,624,953 87,834,758 6.5%
  Germany 474,990,760 478,016,581 487,004,055 2.5%
  Denmark 26,475,718 34,199,588 29,407,355 11.1%
  Estonia 12,621,817 12,109,278 15,329,931 21.5%
  Spain 183,626,981 179,711,225 186,495,894 1.6%
  Finland 33,099,625 44,621,411 42,541,327 28.5%
  France 131,263,787 126,979,048 126,634,806 −3.5%
  Greece 71,267,736 69,965,145 72,717,006 2.0%
  Hungary 26,161,627 25,845,891 26,835,478 2.6%
  Ireland 22,441,000 21,705,328 21,246,117 −5.3%
  Italy 225,989,357 227,439,408 226,368,773 0.2%
  Lithuania 6,603,869 6,516,911 5,998,744 −9.2%
  Luxembourg 2,603,349 2,712,972 2,567,231 −1.4%
  Latvia 2,854,481 2,940,680 2,849,203 −0.2%
  Netherlands 80,351,288 76,701,184 79,874,658 −0.6%
  Poland 203,149,562 209,616,285 209,601,993 3.2%
  Portugal 36,425,915 33,083,871 31,183,076 −14.4%
  Sweden 19,381,623 19,884,147 15,348,209 −20.8%
  Slovenia 8,720,548 8,842,181 9,048,633 3.8%
  Slovakia 25,231,767 25,543,239 24,516,830 −2.8%
  United Kingdom 242,513,099 251,159,840 256,581,160 5.8%
Total 2,012,043,453 2,033,636,557 2,049,927,884 1.9%
  • Figures are in tonnes of CO2
  • Source: European Commission Press Release 23 May 2008[65]

Consequently, observers accused national governments of abusing the system under industry pressure, and urged far stricter caps in the second phase (2008–2012).[66] This led to a stricter regime in the second phase.

Phase II 2008–12 edit

Scope edit

The second phase (2008–12) expanded the scope of the scheme significantly. In 2007, three non-EU members, Norway, Iceland, and Liechtenstein joined the scheme.[67] The EU's "Linking Directive" introduced the CDM and JI credits. Although this was a theoretical possibility in phase I, the over-allocation of permits combined with the inability to bank them for use in the second phase meant it was not taken up.[68]

During Phases I and II, allowances for emissions have typically been given free to firms, which has resulted in them getting windfall profits.[69] Ellerman and Buchner (2008) suggested that during its first two years in operation, the EU-ETS turned an expected increase in emissions of 1–2% per year into a small absolute decline. Grubb et al. (2009) suggested that a reasonable estimate for the emissions cut achieved during its first two years of operation was 50–100 MtCO2 per year, or 2.5–5%.[70]

On 27 April 2012, the European Commission announced the full activation of the EU Emissions Trading System single registry. The full activation process included the migration of over 30,000 EU ETS accounts from national registries. The European Commission further stated that the single registry to be activated in June will not contain all the required functionalities for phase III of the EU ETS.[71]

Phase II saw some tightening, but the use of JI and CDM offsets was allowed, with the result that no reductions in the EU will be required to meet the Phase II cap.[69] For Phase II, the cap is expected to result in an emissions reduction in 2010 of about 2.4% compared to expected emissions without the cap (business-as-usual emissions).[72]

Aviation emissions edit

Aviation emissions were to be included from 2012.[73] The inclusion of aviation was considered important by the EU.[74] The inclusion of aviation was estimated to increase in demand for allowances by about 10–12 million tonnes of CO2 per year in phase two. According to DEFRA, an increased use of JI credits from projects in Russia and Ukraine, would offset any increase in prices so there would be no discernible impact on average annual CO2 prices.[75]

The airline industry and other countries including China, India, Russia, and the United States reacted adversely to the inclusion of the aviation sector.[76] The United States and other countries argued that the EU did not have jurisdiction to regulate flights when they were not in European skies; China and the United States threatened to ban their national carriers from complying with the scheme. On 27 November 2012 the United States enacted the European Union Emissions Trading Scheme Prohibition Act of 2011 which prohibits U.S. carriers from participating in the European Union Emission Trading Scheme.[77][78] China threatened to withhold $60 billion in outstanding orders from Airbus, which in turn led to France pressuring the EU to freeze the scheme.[79]

The EU insisted that the regulation should be applied equally to all carriers, and that it did not contravene international regulations. In the absence of a global agreement on airline emissions, the EU argued that it was forced to go ahead with its own scheme. But only flights within the EEA are covered; international flights are not.[23]

Other edit

Ultimately, the Commission intended that the third trading period should cover all greenhouse gases and all sectors, including aviation, maritime transport, and forestry.[80] For the transport sector, the large number of individual users adds complexities, but might be implemented either as a cap-and-trade system for fuel suppliers or a baseline-and-credit system for car manufacturers.[81]

The National Allocation Plans for Phase II, the first of which were announced on 29 November 2006, provided for an average reduction of nearly 7% below the 2005 emission levels.[82] However, the use of offsets such as Emission Reduction Units from JI and Certified Emission Reductions from CDM projects was allowed, with the result that the EU would be able to meet the Phase II cap by importing units instead of reducing emissions (CCC, 2008, pp. 145, 149).[83]

According to verified EU data from 2008, the ETS resulted in an emissions reduction of 3%, or 50 million tons. At least 80 million tons of "carbon offsets" were bought for compliance with the scheme.[84]

In late 2006, European Commission started infringement proceedings against Austria, Czech Republic, Denmark, Hungary, Italy and Spain, for failure to submit their proposed National Allocation Plans on time.[85]

In July 2020, The Environment Committee of the European Parliament voted to include CO2 emissions from the maritime sector in the European Union (EU) Emissions Trading System (ETS),[86] starting in January 2024, with ships over 5,000 GT.[87]

State allocation plans edit

The annual Member State CO2 yearly allowances in million tonnes are shown in the table:

Million tonnes of CO2 yearly allowances[88]
Member State 1st period
cap 		2005 verified
emissions 		2008–2012 cap
State request Cap allowed
  Austria 33.0 33.4 32.8 30.7
  Belgium 62.1 55.58[a] 63.33 58.5
  Bulgaria 42.3 40.6 67.6 42.3
  Cyprus[b] 5.7 5.1 7.12 5.48
  Czech Republic 97.6 82.5 101.9 86.8
  Denmark 33.5 26.5 24.5 24.5
  Estonia 19 12.62 24.38 12.72
  Finland 45.5 33.1 39.6 37.6
  France 156.5 131.3 132.8 132.8
  Hungary 31.3 26.0 30.7 26.9
  Germany 499 474 482 453.1
  Greece 74.4 71.3 75.5 69.1
  Ireland 22.3 22.4 22.6 21.15
  Italy 223.1 222.5 209 195.8
  Latvia 4.6 2.9 7.7 3.3
  Lithuania 12.3 6.6 16.6 8.8
  Luxembourg 3.4 2.6 3.95 2.7
  Malta[b] 2.9 1.98 2.96 2.1
  Netherlands 95.3 80.35[c] 90.4 85.8
  Poland 239.1 203.1 284.6 208.5
  Portugal 38.9 36.4 35.9 34.8
  Romania 74.8 70.8 95.7 75.9
  Slovakia 30.5 25.2 41.3 30.9
  Slovenia 8.8 8.7 8.3 8.3
  Spain 174.4 182.9 152.7 152.3
  Sweden 22.9 19.3 25.2 22.8
  United Kingdom 245.3 242.4[d] 246.2 246.2
Totals 2298.5 2122.16 2325.34 2080.93
  1. ^ Including installations opted out in 2005
  2. ^ a b Cyprus and Malta, as new EU accession states, but not Annex I countries, will have their own NAPs and participate in trading during Phase II.
  3. ^ Verified emissions for 2005 do not include installations opted out in 2005 which will be covered in 2008 and 2012 and are estimated to amount to some 6 Mt.
  4. ^ UK's verified emissions for 2005 do not include installations opted out in 2005 which will be covered in 2008 and 2012 and are estimated to amount to some 30 Mt.

Carbon price edit

The carbon price[89] within Phase II increased to over €20/tCO2 in the first half of 2008 (CCC, 2008, p. 149). The average price was €22/tCO2 in the second half of 2008, and €13/tCO2 in the first half of 2009. CCC (2009, p. 67) gave two reasons for this fall in prices:[90]

  • Reduced output in energy-intensive sectors as a result of the recession. This means that less abatement will be required to meet the cap, lowering the carbon price.
  • The market perception of future fossil fuel prices may have been revised downwards.

Projections made in 2009 indicate that like Phase I, Phase II would see a surplus in allowances and that 2009 carbon prices were being sustained by the need to "bank" allowances to surrender them in the tougher third phase.[48] In December 2009, carbon prices dropped to a six-month low after the Copenhagen climate summit outcome disappointed traders. Prices for EU allowances for December 2010 delivery dropped 8.7% to 12.40 euros a tonne.[91]

In March 2012, according to the periodical Economist, the EUA permit price under the EU ETS had "tanked" and was too low to provide incentives for firms to reduce emissions. The permit price had been persistently under €10 per tonne compared to nearly €30 per tonne in 2008. The market had been oversupplied with permits.[92] In June 2012, EU allowances for delivery in December 2012 traded at 6.76 euros each on the Intercontinental Exchange Futures Europe exchange, a 61 percent decline compared with a year previously.[93]

In July 2012, Thomson Reuters Point Carbon stated that it considered that without intervention to reduce the supply of allowances, the price of allowances would fall to four Euros.[94] The 2012 closing price for an EU allowance with a December 2013 contract ended the year at 6.67 euros a tonne.[95] In late January 2013, the EU allowance price fell to a new record low of 2.81 euros after the energy and industry committee of the European parliament opposed a proposal to withhold 900 million future-dated allowances from the market.[96]

Phase III 2013–2020 edit

For Phase III (2013–2020), the European Commission implemented a number of changes, including (CCC, 2008, p. 149):[83]

  • the setting of an overall EU cap, with allowances then allocated to EU members;
  • tighter limits on the use of offsets;
  • limiting banking of allowances between Phases II and III;
  • a move from allowances to auctioning;
  • and the inclusion of more sectors and gases.

Also, millions of allowances set aside in the New Entrants Reserve (NER) to fund the deployment of innovative renewable energy technologies and carbon capture and storage through the NER 300 programme, one of the world's largest funding programmes for innovative low-carbon energy demonstration projects.[97] The programme is conceived as a catalyst for the demonstration of environmentally safe carbon capture and storage (CCS) and innovative renewable energy (RES) technologies on a commercial scale within the European Union.[98]

Ahead of its accession to the EU, Croatia joined the ETS at the start of Phase III on 1 January 2013.[99][100] This took the number of countries in the EU ETS to 31.

On 4 January 2013, European Union allowances for 2013 traded on London's ICE Futures Europe exchange for between 6.22 euros and 6.40 euros.[101]

The number of excess allowances carried over ("banked") from Phase II to Phase III was 1.7 billion.[102]

Phase IV 2021–2030 edit

Phase IV commenced on 1 January 2021 and will finish on 31 December 2030.[103] The European Commission plans a full review of the Directive by 2026. Since 2018, prices have continuously increased, reaching €57/tCO2 (67 $) in July 2021.[104] This results in additional costs of about €0.04/kWh for coal and €0.02/kWh for gas combustion for electricity.

Reform of the EU-ETS and introduction of the Market Stability Reserve (MSR) edit

On 22 January 2014, the European Commission proposed two structural reform amendments to the ETS directive (2003/87/EC) of the 2008 Climate Package to be agreed on in the Council Conclusions[105] on 20–21 March 2014 by the Heads of EU Member States at the meeting of the European Council:[106]

  • the linear reduction factor, at which the overall emissions cap is reduced, from 1.74% (2013–2020) to 2.2% each year from 2021 to 2030, thus reducing EU CO2 emissions in the ETS sector by 43% compared to 2005[107]
  • the creation of a 12% "automatic set-aside" reserve mechanism of verified annual emissions (at least a 100 million CO2 permit reserve) in the fourth ETS period from 2021 to 2030, thus creating a quasi carbon tax or "carbon price floor" with a price range set each year by the European Commission's Directorate General for Climate Change[108]

Connie Hedegaard, the EU Commissioner for Climate Change, hoped "to link up the ETS with compatible systems around the world to form the backbone of a global carbon market" with Australia cited as an example.[26] However, as the COP 19 Climate Conference again ended with no binding new international agreement in 2013, and after the election of the Liberal-National government, Australia dismantled its ETS system.[109]

Before the European Council summit on 20 March 2014,[110] the European Commission decided to propose a change in the functioning of the carbon market (CO2 permits). The submitted legislation on the Market Stability Reserve system (MSR) would change the amount of annually auctioned CO2 permits based on the amount of CO2 permits in circulation.[111] On 24 October 2014, at the meeting of the European Council, the Heads of Governments of EU Member States provided legal certainty to the proposed Market Stability Reserve (MSR) by sanctioning the political project in the text of the Council Conclusions.[112] This would address imbalances in supply and demand in the European carbon market by adjusting volumes for auction. The reserve would operate on predefined rules with no discretion for the commission or Member States.

The European Parliament and the European council informally agreed on an adapted version of this proposal, which sets the starting date of the MSR to 2019 (so already in Phase III), puts the 900 million backloaded allowances in the reserve and reduces the reaction time of the MSR to one year. The adopted proposal was passed as Decision (EU) 2015/1814[27] by the European parliament and the Council of ministers in 2015.[28]

In 2023, carbon prices fell to around 70 euros per ton, down from over 100 euros, affecting funding for the EU Innovation Fund and highlighting the MSR's critical role in stabilizing the market.[113]

Reform of the Market Stability Reserve (MSR) edit

In the years 2014–2017, the back-loading of auction volumes and the legislation on introducing the MSR had neither substantially decreased the surplus of allowances nor substantially increased allowance prices in the EU-ETS, with EUA prices remaining below €10/tCO2. In 2018, the MSR was reformed again with Directive (EU) 2018/410,[30] primarily to reduce the surplus of emissions allowances and create additional scarcity:[114][115]

  • For the period from 2019 to 2023, the share of allowances put into the MSR was increased from 12% to 24%
  • From 2023 onwards, all allowances in the MSR above the total number of allowances auctioned during the previous year would become invalid
  • Unilateral invalidation of allowances by member states that take additional policy measures leading to reduced demand for EUAs.

This reform lead to a strong increase of EUA prices in 2018, with prices staying mostly in a range of €18-30/tCO2 from August 2018 to March 2020.

"Fit for 55" package edit

The change in the overall EU emissions target to –55% reduction versus 1990 in the European Green Deal necessitated tightening of the EU ETS reduction target for 2030 of –43% with respect to 2005. The EU commission proposed in its "Fit for 55" package to increase the EU ETS reduction target for 2030 to –61% compared to 2005.[3] Such a tighter EU ETS target could increase scarcity of EUAs and thus raise EUA prices higher, with modeling studies estimating carbon prices in the range of €90-€130/tCO2 for 2030.[116][117]

The EU commission also proposed to include emissions from maritime transport in the EU ETS.[3]

Russian invasion of Ukraine 2022 edit

The 24 February 2022 invasion sent carbon prices plunging from €97 in early February down to below €70.[118]

Costs edit

Emissions in the EU have been reduced at costs that are significantly lower than projected,[48] though transaction costs are related to economies of scale and can be significant for smaller installations.[119] Overall, the estimated cost was a fraction of 1% of GDP. It was suggested that if permits were auctioned, and the revenues used effectively, e.g., to reduce distortionary taxes and fund low-carbon technologies, costs could be eliminated, or even create a positive economic impact.

Overall emission reductions edit

According to the European Commission, greenhouse gas emissions from big emitters covered by the EU ETS had decreased by an average of more than 17,000 tonnes per installation between 2005 and 2010, a decrease of more than 8%.[120]

A 2020 study found that the European Union Emissions Trading System successfully reduced CO2 emissions even though the prices for carbon were set at low prices.[6]

A 2023 study on the effects of the EU ETS identified a reduction in carbon emissions in the order of a 10% decrease between 2005 and 2012. The study compared regulated and unregulated companies, concluding that the EU ETS had no significant impact on profits and employment and led to an increase in revenues and fixed assets for regulated companies.[7]

Inclusion of sinks edit

Currently, the EU does not allow CO2 credits under ETS to be obtained from sinks (e.g. reducing CO2 by planting trees). However, some governments and industry representatives lobby for their inclusion. The inclusion is currently opposed by NGOs as well as the EU commission itself, arguing that sinks are surrounded by too many scientific uncertainties over their permanence and that they have inferior long-term contribution to climate change compared to reducing emissions from industrial sources.[121]

ETS related crime edit

Cybercrime edit

On 19 January 2011, the EU emissions spot market for pollution permits was closed after computer hackers stole 28 to 30 million euros ($41.12 million) worth of emissions allowances from the national registries of several European countries within a few days time period. The Czech Registry for Emissions Trading was especially hard hit with 7 million euros worth of allowances stolen by hackers from Austria, the Czech Republic, Greece, Estonia, and Poland. A phishing scam is suspected to have enabled hackers to log into unsuspecting companies' carbon credit accounts and transfer the allowances to themselves, allowing them to then be sold.[122][123]

The European Commission said it would "proceed to determine together with national authorities what minimum security measures need to be put in place before the suspension of a registry can be lifted". Maria Kokkonen, EC spokeswoman for climate issues, said that national registries can be reopened once sufficient security measures have been enacted and member countries submit to the EC a report of their IT security protocol.

The Czech registry said there are still[when?] legal and administrative hurdles to be overcome and Jiri Stastny, chairman of OTE AS, the Czech registry operator, said that until there is recourse for victims of such theft, and a system is in place to return allowances to their rightful owners, the Czech registry will remain closed. Registry officials in Germany and Estonia have confirmed they have located 610,000 allowances stolen from the Czech registry, according to Mr. Stastny. Another 500,000 of the stolen Czech allowances are thought to be in accounts in the UK, according to the OTE.[122][123][124]

Cyber fraudsters have also attacked the EU ETS with a "phishing" scam which cost one company €1.5 million.[125] In response to this, the EU has revised the ETS rules to combat crime.[126]

The security breaches raised fears among some traders that they might have unknowingly purchased stolen allowances which they might later have to forfeit. The ETS experienced a previous phishing scam in 2010 which caused 13 European markets to shut down, and criminals cleared 5 million euros in another cross-border fraud in 2008 and 2009.[123]

VAT fraud edit

In 2009 Europol informed that 90% market volume of emissions traded in some countries could be result of tax fraud, more specifically missing trader fraud, costing governments more than 5 billion euros.[127]

German prosecutors confirmed in March 2011 that value-added-tax fraud in the trade of carbon-dioxide emissions has deprived the German state of about €850 million ($1.19 billion). In December 2011 a German court sentenced six people to jail terms of between three years and seven years and 10 months in a trial involving evasion of taxes on carbon permits. A French court sentenced five people to one to five years in jail, and to pay massive fines for evading tax through carbon trading. In the UK a first trial over VAT fraud in the carbon market is put on track to start in February 2012.

Views on the EU ETS edit

People and organizations responded differently to the EU ETS. Mr. Anne Theo Seinen, of the EC's Directorate-General for the Environment, described Phase I as a "learning phase", where, for example, the infrastructure and institutions for the ETS were set up (UK Parliament, 2009).[128] In his view, the carbon price in Phase I had resulted in some abatement. Seinen also commented that the EU ETS needed to be supported by other policies for technology and renewable energy. According to CCC (2008, p. 155), technology policy is necessary to overcome market failures associated with delivering low-carbon technologies, e.g., by supporting research and development.[83]

In 2009 the World Wildlife Fund commented that there was no indication that the EU ETS had influenced longer-term investment decisions.[129] In their view, the Phase III scheme brought about significant improvements, but still suffered from major weaknesses. Jones et al. (2008, p. 24) suggested that the EU ETS needed further reform to achieve its potential.[130]

A 2016 survey of German companies participating in the EU ETS found that under current trading conditions, the EU ETS has generated weak incentives for participating firms to adopt carbon abatement measures.[131][132]

Criticisms edit

The EU ETS has been criticized[133] for several points, including: over-allocation, windfall profits, price volatility, and in general for failing to meet its goals.[134] Proponents maintain, however, that Phase I of the EU ETS (2005–2007) was a "learning phase" designed primarily to establish baselines and create the infrastructure for a carbon market, not to achieve significant reductions.[135][136][137]

A number of design flaws have limited the effectiveness of the scheme.[72] In the initial 2005–07 period, emission caps were not tight enough to drive a significant reduction in emissions.[69] The total allocation of allowances turned out to exceed actual emissions. This drove the carbon price down to zero in 2007. This oversupply was caused because the allocation of allowances by the EU was based on emissions data from the European Environmental Agency in Copenhagen, which uses a horizontal activity-based emissions definition similar to the United Nations, the EU-ETS Transaction log in Brussels, but a vertical installation-based emissions measurement system. This caused an oversupply of 200 million tonnes (10% of market) in the EU-ETS in the first phase and collapsing prices.[138]

In addition, the EU ETS has been criticized as having caused a disruptive spike in energy prices.[139] Defenders of the scheme say that this spike did not correlate with the price of permits, and in fact the largest price increase occurred at a time (Mar–Dec 2007) when the cost of permits was negligible.[137]

Researchers Preston Teeter and Jorgen Sandberg have argued that it is largely the uncertainty behind the EU's scheme that has resulted in such a tepid and informal response by regulated organizations. Their research has revealed a similar outcome in Australia, where organizations saw little incentive to innovate and even comply with cap and trade regulations.[140]

Some critics in EU blamed the EU ETS for contributing to the 2021 global energy crisis.[141][142]

Over-allocation edit

There was an oversupply of emissions allowances for EU ETS Phase I. This drove the carbon price down to zero in 2007 (CCC, 2008, p. 140).[83] This oversupply reflects the difficulty in predicting future emissions which is necessary in setting a cap.[45] Given poor data about emissions baselines, inherent uncertainty of emissions forecasts, and the very modest reduction goals of the Phase I cap (1–2% across the EU), it was entirely expected that[according to whom?] the cap might be set too high.[137]

This problem naturally diminishes as the cap tightens. The EU's Phase II cap is more than 6% below 2005 levels, much stronger than Phase I, and readily distinguishable from business-as-usual emissions levels.[according to whom?][137]

Over-allocation does not imply that no abatement occurred. Even with over-allocation, there was theoretically a price on carbon (except for installations that received hundreds of thousands of free allowances). For some installations, the price had some effect on emitters' behavior. Verified emissions in 2005 were 3–4% below projected emissions,[136] and analysis suggests that at least part of that reduction was due to the EU ETS.[143]

In September 2012, Thomson Reuters Point Carbon calculated that the first Kyoto Protocol commitment period had been oversupplied by about 13 billion tonnes (13.1 Gt) of CO2 and that the second commitment period (2013–2020) was likely to start with a surplus of Assigned Amount Units (AAUs).[144]

Windfall profits edit

According to Newbery (2009), the price of EUAs was included in the final price of electricity.[38] The free allocation of permits was cashed in at the EUA price by fossil generators, resulting in a "massive windfall gain". Newbery (2009) wrote that "[there] is no case for repeating such a willful misuse of the value of a common property resource that the country should own". In the view of 4CMR (2009), all permits in the EU ETS should be auctioned.[145] This would avoid possible windfall profits in all sectors.

Price volatility edit

The price of emissions permits tripled in the first six months of Phase I, collapsed by half in a one-week period in 2006, and declined to zero over the next twelve months. Such movements and the implied volatility raised questions about the viability of the Phase I system to provide stable incentives to emitters.[137]

In future phases, measures such as banking of allowances, auctioning, and price floors were considered to mitigate volatility.[146] However, it's important to note that considerable volatility is expected of this type of market, and the volatility seen is quite in line with that of energy commodities generally. Nonetheless, producers and consumers in those markets respond rationally and effectively to price signals.[137]

Newbery (2009) commented that Phase I of the EU ETS was not delivering the stable carbon price necessary for long-term, low-carbon investment decisions.[38] He suggested that efforts should be made to stabilize carbon prices, e.g., by having a price ceiling and a price floor. This led to the reforms outlined above in Phases II and III.

Main article: Carbon price

Offsetting edit

Project based offsetting edit

The EU ETS is "linked" to the Joint Implementation and Clean Development Mechanism projects as it allows the limited use of "offset credits" from them. Participating firms were allowed to use some Certified Emission Reduction units (CERs) from 2005 and Emission Reduction Units (ERUs) from 2008. Each Member State's National Allocation Plan must specify a percentage of the national allocation that will be the cap on the CERs and ERUs that may be used. CERs and ERUs from nuclear facilities and from Land Use, Land-Use Change and Forestry may not be used.[147]

The main theoretical advantage of allowing free trading of credits is that it allows mitigation to be done at least-cost (CCC, 2008, p. 160).[83] This is because the marginal costs (that is to say, the incremental costs of preventing the emission of one extra ton of CO2e into the atmosphere) of abatement differs among countries. In terms of the UK's climate change policy, CCC (2008), noted three arguments against too great a reliance on credits:

  • Rich countries need to demonstrate that a low-carbon economy is possible and compatible with economic prosperity. This is to convince developing countries to lower their emissions. Additionally, domestic action by rich countries drives investment towards a low-carbon economy.
  • An ambitious long-term target to reduce emissions, e.g., an 80% cut in UK emissions by 2050, requires significant domestic progress by 2020 and 2030 to reduce emissions.
  • CDM credits are inherently less robust than a cap and trade system, where reductions are required in total emissions.

Due to the economic downturn, states have pushed successfully for a more generous approach towards the use of CDM/JI credits post-2012.[148][attribution needed] The 2009 EU ETS Amending Directive states that credits can be used for up to 50% of the EU-wide reductions below the 2005 levels of existing sectors over the period 2008–2020.[149] Moreover, it has been argued that the volume of CDM/JI credits, if carried over from phase II (2008–2012 to phase III 2013–2020) in the EU ETS will undermine its environmental effectiveness, despite the requirement of supplementarity in the Kyoto Protocol.[150]

In January 2011, the EU Climate Change Committee banned the use of CDM Certified Emission Reduction units from HFC-23 destruction in the European Union Emissions Trading Scheme from 1 May 2013. The ban includes nitrous oxide (N2O) from adipic acid production. The reasons given were the perverse incentives, the lack of additionality, the lack of environmental integrity, the under-mining of the Montreal Protocol, costs and ineffectiveness and the distorting effect of a few projects in advanced developing countries getting too many CERs.[151]

Buying and deleting emissions allowances edit

As an alternative to CDM and JI projects, emissions can be offset directly by buying and deleting emissions allowances inside the ETS. This is a way to avoid several problems of CDM and JI such as additionality, measurement, leakage, permanence, and verification.[152] Buying and cancelling allowances allows to include more emissions sources in the ETS (such as traffic). Furthermore, it reduces the available allowances in the cap-and-trade system, which means that it reduces the emissions that can be produced by covered sources.[153]

See also edit

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External links edit

Official pages

  • European Commission, "Emissions Trading System (EU ETS)"
  • "Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003", Official Journal of the European Union – EU Directive establishing EU ETS

How ETS works

  • Emission Trading Fact Book of Inagendo (contains, among others, a glossary of ETS terms)
  • Video from Climate and Pollution Agency (Norway): The Emission Trading Scheme

Key reports, and assessments

  • Prospects for the EU Emissions Trading System, Library of the European Parliament, June 2012
  • Executive summary of report by Climate Action Network.
  • Carbon Trade Watch
  • "The environmental effectiveness and economic efficiency of the EU ETS: Structural aspects of the allocation". by WWF and Öko-Institut, 9 November 2005.
  • The European Emission Trading Scheme Put to the Test of State Aid Rules
  • Scarcity and Allocation of Allowances in the EU Emissions Trading Scheme – A Legal Analysis.

Case law

  • Swiss International Air Lines AG v UK SoS for Energy and Climate Change [2015] EWCA Civ 331

January 01, 1970
european, union, emissions, trading, system, carbon, emission, trading, scheme, trade, scheme, which, began, 2005, intended, lower, greenhouse, emissions, european, union, countries, trade, schemes, limit, emissions, specified, pollutants, over, area, allow, c. The European Union Emissions Trading System EU ETS is a carbon emission trading scheme or cap and trade scheme which began in 2005 and is intended to lower greenhouse gas emissions by the European Union countries Cap and trade schemes limit emissions of specified pollutants over an area and allow companies to trade emissions rights within that area The EU ETS covers around 45 of the EU s greenhouse gas emissions 1 Price of CO2 in the EU Emissions Trading System Price of CO2 in the EU Emissions Trading System The scheme has been divided into four trading periods The first ETS trading period lasted three years from January 2005 to December 2007 The second trading period ran from January 2008 until December 2012 coinciding with the first commitment period of the Kyoto Protocol The third trading period lasted from January 2013 to December 2020 Compared to 2005 when the EU ETS was first implemented the proposed caps for 2020 represents a 21 reduction of greenhouse gases This target has been reached six years early as emissions in the ETS fell to 1 812 billion 109 tonnes in 2014 2 The fourth phase started in January 2021 and will continue until December 2030 The emission reductions to be achieved over this period are unclear as of November 2021 as the European Green Deal necessitates tightening of the current EU ETS reduction target for 2030 of 43 with respect to 2005 The EU commission proposes in its Fit for 55 package to increase the EU ETS reduction target for 2030 to 61 compared to 2005 3 4 EU countries view the emissions trading scheme as necessary to meeting climate goals A strong carbon market guides investors and industry in their transition from fossil fuels 5 A 2020 study found that the EU ETS successfully reduced CO2 emissions even though the prices for carbon were set at low prices 6 A 2023 study on the effects of the EU ETS identified a reduction in carbon emissions in the order of 10 between 2005 and 2012 with no impacts on profits or employment for regulated firms 7 The price of EU allowances exceeded 100 tCO2 118 in February 2023 5 Contents 1 Setup 2 History 3 Mechanisms 3 1 Allocation 3 2 Competitiveness 3 3 Banking and borrowing 3 4 Members 3 5 Linking 4 Phase I 2005 2007 4 1 Launch and operation 4 2 Prices 4 3 Verified emissions 5 Phase II 2008 12 5 1 Scope 5 2 Aviation emissions 5 3 Other 5 4 State allocation plans 5 5 Carbon price 6 Phase III 2013 2020 7 Phase IV 2021 2030 7 1 Reform of the EU ETS and introduction of the Market Stability Reserve MSR 7 2 Reform of the Market Stability Reserve MSR 7 3 Fit for 55 package 7 4 Russian invasion of Ukraine 2022 8 Costs 9 Overall emission reductions 10 Inclusion of sinks 11 ETS related crime 11 1 Cybercrime 11 2 VAT fraud 12 Views on the EU ETS 12 1 Criticisms 12 2 Over allocation 12 3 Windfall profits 12 4 Price volatility 13 Offsetting 13 1 Project based offsetting 13 2 Buying and deleting emissions allowances 14 See also 15 References 16 External linksSetup edit nbsp European allowance prices from 2009 The EU Emission Trading System follows the cap and trade model where one allowance permits the holder to emit 1 ton of CO2 tCO2 Under this scheme a maximum cap is set on the total amount of greenhouse gases that can be emitted by all participating installations EU Allowances for emissions are then auctioned off or allocated for free and can subsequently be traded Installations must monitor and report their CO2 emissions ensuring they hand in enough allowances to the authorities to cover their emissions In order to exceed its emissions allowance an installation must purchase allowances from others Conversely if an installation emits less than its allowance it can sell its leftover credits This allows the system to find the most cost effective ways of reducing emissions without significant government intervention citation needed The scheme was said to cover energy and heat generation industries and around 11 186 plants participated in the first stage These plants only accounted for 45 of all European emissions at the time More than 90 of all these allowances were free of cost in both periods to build a strong base of abatements for the future phases 8 This free allocation resulted in the volume and value of allowances growing three fold over 2006 with the price moving from 19 tCO2 in 2005 to its peak of 30 tCO2 9 which revealed a new problem The overallocation of allowances caused the price to drop to 1 tCO2 in the first few months of 2007 which created market price instabilities for businesses to reinvest in low carbon technologies The European Union Emission Trading Scheme or EU ETS is the largest multi national greenhouse gas emissions trading scheme in the world After voluntary trials in the UK and Denmark Phase I began operation in January 2005 with all 15 member states of the European Union participating 10 The program caps the amount of carbon dioxide that can be emitted from large installations with a net heat supply in excess of 20 MW such as power plants and carbon intensive factories 11 and covers almost half 46 of the EU s Carbon Dioxide emissions 12 Phase I permits participants to trade among themselves and in validated credits from the developing world through Kyoto s Clean Development Mechanism Credits are gained by investing in clean technologies and low carbon solutions and by certain types of emission saving projects around the world to cover a proportion of their emissions 13 History editThe EU ETS was the first large greenhouse gas emissions trading scheme in the world 14 It was launched in 2005 to fight global warming and is a major pillar of EU energy policy 15 As of 2013 the EU ETS covers more than 11 000 factories power stations and other installations with a net heat excess of 20 MW in 31 countries all 27 EU member states plus Iceland Norway Liechtenstein and United Kingdom 16 In 2008 the installations regulated by the EU ETS were collectively responsible for close to half of the EU s anthropogenic emissions of CO2 and 40 of its total greenhouse gas emissions 17 18 The EU had set a target for 2020 to cut greenhouse gas emissions by 20 compared with 1990 to reduce energy consumption by 20 compared to the 2007 baseline scenario and to achieve a 20 share of gross final energy consumption from renewable energy sources all of which was achieved 19 A 2020 study estimated that the EU ETS had reduced CO2 emissions by more than 1 billion tons between 2008 and 2016 or 3 8 of total EU wide emissions 20 The EU ETS has seen a number of significant changes with the first trading period described as a learning by doing phase 21 Phase III saw a turn to auctioning more permits rather than allocating freely in 2013 over 40 of the allowances were auctioned 22 harmonisation of rules for the remaining allocations and the inclusion of other greenhouse gases such as nitrous oxide and perfluorocarbons 18 In 2012 the EU ETS was also extended to the airline industry though this only applies within the EEA 23 24 25 The price of EU ETS carbon credits has been lower than intended with a large surplus of allowances in part because of the impact of the recent economic crisis on demand 26 In 2012 the Commission said it would delay the auctioning of some allowances 26 In 2015 the EU passed the decision EU 2015 1814 27 to establish a Market Stability Reserve that adjusts the annual supply of CO2 permits based on the CO2 permits in circulation in the previous year 28 29 In 2018 the Market Stability Reserve was amended by Directive EU 2018 410 30 so that a certain amount of permits inside the reserve would be cancelled from 2023 onwards In January 2008 Norway Iceland and Liechtenstein joined the European Union Emissions Trading System EU ETS 31 The Norwegian Ministry of the Environment has also released its draft National Allocation Plan which provides a carbon cap and trade of 15 million tonnes of CO2 8 million of which are set to be auctioned 32 According to the OECD Economic Survey of Norway 2010 the nation has announced a target for 2008 12 10 below its commitment under the Kyoto Protocol and a 30 cut compared with 1990 by 2020 33 In 2012 EU 15 emissions was 15 1 below their base year level Based on figures for 2012 by the European Environment Agency EU 15 emissions averaged 11 8 below base year levels during the 2008 2012 period This means the EU 15 over achieved its first Kyoto target by a wide margin 34 Mechanisms editThe first phase of EU ETS was created to operate apart from international climate change treaties such as the pre existing United Nations Framework Convention on Climate Change UNFCCC 1992 or the Kyoto Protocol that was subsequently 1997 established under it When the Kyoto Protocol came into force on 16 February 2005 Phase I of the EU ETS had already become operational The EU later agreed to incorporate Kyoto flexible mechanism certificates as compliance tools within the EU ETS The Linking Directive allows operators to use a certain amount of Kyoto certificates from flexible mechanism projects to cover their emissions The Kyoto flexible mechanisms are Joint Implementation projects JI defined by Article 6 of the Kyoto Protocol which produce Emission Reduction Units ERUs One ERU represents the successful emissions reduction equivalent to one tonne of carbon dioxide equivalent tCO2e the Clean Development Mechanism CDM defined by Article 12 which produces Certified Emission Reductions CERs One CER represents the successful emissions reduction equivalent to one tonne of carbon dioxide equivalent tCO2e International Emissions Trading IET defined by Article 17 IET is relevant as the reductions achieved through CDM projects are a compliance tool for EU ETS operators These Certified Emission Reductions CERs can be obtained by implementing emission reduction projects in developing countries outside the EU that have ratified or acceded to the Kyoto Protocol The implementation of Clean Development Projects is largely specified by the Marrakech Accords a follow on set of agreements by the Conference of the Parties to the Kyoto Protocol The legislators of the EU ETS drew up the scheme independently but called on the experiences gained during the running of the voluntary UK Emissions Trading Scheme in the previous years 35 and collaborated with other parties to ensure its units and mechanisms were compatible with the design agreed through the UNFCCC Under the EU ETS the governments of the EU Member States agree on national emission caps which have to be approved by the EU commission Those countries then allocate allowances to their industrial operators and track and validate the actual emissions in accordance with the relevant assigned amount They require the allowances to be retired after the end of each year The operators within the ETS may reassign or trade their allowances by several means privately moving allowances between operators within a company and across national borders over the counter using a broker to privately match buyers and sellers trading on the spot market of one of Europe s climate exchanges Like any other financial instrument trading consists of matching buyers and sellers between members of the exchange and then settling by depositing a valid allowance in exchange for the agreed financial consideration Much like a stock market companies and private individuals can trade through brokers who are listed on the exchange and need not be regulated operators When each change of ownership of an allowance is proposed the national Emissions Trading Registry and the European Commission are informed in order for them to validate the transaction During Phase II of the EU ETS the UNFCCC also validates the allowance and any change that alters the distribution within each national allocation plan 36 11 Like the Kyoto trading scheme EU ETS allows a regulated operator to use carbon credits in the form of Emission Reduction Units ERU to comply with its obligations A Kyoto Certified Emission Reduction unit CER produced by a carbon project that has been certified by the UNFCCC Clean Development Mechanism Executive Board or Emission Reduction Unit ERU certified by the Joint Implementation project s host country or by the Joint Implementation Supervisory Committee are accepted by the EU as equivalent Thus one EU Allowance Unit of one tonne of CO2 or EUA was designed to be identical fungible with the equivalent assigned amount units AAU of CO2 defined under Kyoto Hence because of the EU decision to accept Kyoto CERs as equivalent to EU EUAs it is possible to trade EUAs and UNFCCC validated CERs on a one to one basis within the same system However the EU was not able to link trades from all its countries until 2008 9 because of its technical problems connecting to the UN systems 37 During Phase II of the EU ETS the operators within each Member State must surrender their allowances for inspection by the EU before they can be retired by the UNFCCC Allocation edit The total number of permits issued either auctioned or allocated determines the supply for the allowances The actual price is determined by the market Too many allowances compared to demand will result in a low carbon price and reduced emission abatement efforts 38 Too few allowances will result in a high carbon price 39 For each EU ETS Phase the total quantity to be allocated by each Member State is defined in the National Allocation Plan equivalent to its UNFCCC defined carbon account The European Commission has oversight of the NAP process and decides if the NAP fulfills the twelve criteria set out in the Annex III of the Emission Trading Directive EU Directive 2003 87 EC The first and foremost criterion is that the proposed total quantity is in line with a Member State s Kyoto target Of course the Member State s plan can and should also take account of emission levels in other sectors not covered by the EU ETS and address these within its own domestic policies For instance transport is responsible for 21 of EU greenhouse gas emissions households and small businesses for 17 and agriculture for 10 40 During Phase I most allowances in all countries were given freely known as grandfathering This approach has been criticized 41 as giving rise to windfall profits being less efficient than auctioning and providing too little incentive for innovative new competition to provide clean renewable energy 42 43 On the other hand allocation rather than auctioning may be justified for a few sectors that face international competition like the aluminium and steel industries 44 45 To address these problems citation needed the European Commission proposed various changes in a January 2008 package including the abolishment of NAPs from 2013 and auctioning a far greater share ca 60 in 2013 growing afterward of emission permits From the start of Phase III January 2013 there will be a centralized allocation of permits not National Allocation Plans with a greater share of auctioning of permits 46 Competitiveness edit Allocation can act as a means of addressing concerns over loss of competitiveness and possible leakage carbon leakage of emissions outside the EU Leakage is the effect of emissions increasing in countries or sectors that have weaker regulation of emissions than the regulation in another country or sector 47 Such concerns affect the following sectors cement steel aluminium pulp and paper basic inorganic chemicals and fertilisers ammonia 45 Leakage from these sectors was thought to be under 1 of total EU emissions Correcting for leakage by allocating permits acts as a temporary subsidy for affected industries but does not fix the underlying problem Border adjustments would be the economically efficient choice where imports are taxed according to their carbon content 38 44 One problem with border adjustments is that they might be used as a disguise for trade protectionism 48 Some adjustments may also not prevent emissions leakage Banking and borrowing edit Within a certain trading period banking and borrowing is allowed For example a 2006 EUA can be used in 2007 banking or in 2005 borrowing Interperiod borrowing is not allowed Member states had the discretion to decide whether banking EUAs from Phase I to Phase II was allowed 49 Members edit Graphs are unavailable due to technical issues There is more info on Phabricator and on MediaWiki org Participant countries in the EU ETS The UK a participant until 31 December 2020 The Swiss ETS linked to the EU ETS since 1 January 2020 The EU ETS operates in 30 countries the 27 EU member states plus Iceland Liechtenstein and Norway 50 The United Kingdom left the EU on 31 January 2020 but remained subject to EU rules until 31 December 2020 The UK Emissions Trading Scheme UK ETS replaced the UK s participation in the EU ETS on 1 January 2021 51 but the UK government required organisations to continue to comply with their existing obligations under the 2020 scheme year which ended on 30 April 2021 52 Linking edit The EU ETS is linked to the Swiss Emissions Trading System de since 1 January 2020 53 Linking systems creates a larger carbon market which can reduce overall compliance costs increase market liquidity and generate a more stable carbon market 54 55 Linking systems can also be politically symbolic as it shows willingness to undertake a common effort to reduce GHG emissions 56 Some scholars have argued that linking may provide a starting point for developing a new bottom up international climate policy architecture whereby multiple unique systems successively link their various systems 57 58 59 Phase I 2005 2007 editIn the first phase 2005 2007 the EU ETS included some 12 000 installations representing approximately 40 of EU CO2 emissions covering energy activities combustion installations with a rated thermal input exceeding 20 MW mineral oil refineries coke ovens production and processing of ferrous metals mineral industry cement clinker glass and ceramic bricks and pulp paper and board activities 60 Launch and operation edit The ETS in which all 15 Member States that were then members of the European Union participated nominally commenced operation on 1 January 2005 although national registries were unable to settle transactions for the first few months However the prior existence of the UK Emissions Trading Scheme meant that market participants were already in place and ready In its first year 362 million tonnes of CO2 were traded on the market for a sum of 7 2 billion and a large number of futures and options 61 Prices edit The price of allowances increased more or less steadily to a peak level in April 2006 of about 30 per tonne CO2 62 In late April 2006 a number of EU countries the Netherlands the Czech Republic Belgium France and Spain announced that their verified or actual emissions were less than the number of allowances allocated to installations The spot price for EU allowances dropped 54 from 29 20 to 13 35 in the last week of April 2006 In May 2006 the European Commission confirmed that verified CO2 emissions were about 80 million tonnes or 4 lower than the number of allowances distributed to installations for 2005 emissions 63 In May 2006 prices fell to under 10 tonne Lack of scarcity under the first phase of the system continued through 2006 resulting in a trading price of 1 2 per tonne in March 2007 declining to 0 10 in September 2007 In 2007 carbon prices for the trial phase dropped to near zero for most of the year Meanwhile prices for Phase II remained significantly higher throughout reflecting the fact that allowances for the trial phase were set to expire by 31 December 2007 64 Verified emissions edit Verified emissions showed a net increase over the first phase of the scheme For the countries for which data was available emissions increased by 1 9 between 2005 and 2007 at the time all 27 member states minus Romania Bulgaria and Malta Country Verified emissions Change 2005 2006 2007 2005 2007 nbsp Austria 33 372 826 32 382 804 31 751 165 4 9 nbsp Belgium 55 363 223 54 775 314 52 795 318 4 6 nbsp Cyprus 5 078 877 5 259 273 5 396 164 6 2 nbsp Czech Republic 82 454 618 83 624 953 87 834 758 6 5 nbsp Germany 474 990 760 478 016 581 487 004 055 2 5 nbsp Denmark 26 475 718 34 199 588 29 407 355 11 1 nbsp Estonia 12 621 817 12 109 278 15 329 931 21 5 nbsp Spain 183 626 981 179 711 225 186 495 894 1 6 nbsp Finland 33 099 625 44 621 411 42 541 327 28 5 nbsp France 131 263 787 126 979 048 126 634 806 3 5 nbsp Greece 71 267 736 69 965 145 72 717 006 2 0 nbsp Hungary 26 161 627 25 845 891 26 835 478 2 6 nbsp Ireland 22 441 000 21 705 328 21 246 117 5 3 nbsp Italy 225 989 357 227 439 408 226 368 773 0 2 nbsp Lithuania 6 603 869 6 516 911 5 998 744 9 2 nbsp Luxembourg 2 603 349 2 712 972 2 567 231 1 4 nbsp Latvia 2 854 481 2 940 680 2 849 203 0 2 nbsp Netherlands 80 351 288 76 701 184 79 874 658 0 6 nbsp Poland 203 149 562 209 616 285 209 601 993 3 2 nbsp Portugal 36 425 915 33 083 871 31 183 076 14 4 nbsp Sweden 19 381 623 19 884 147 15 348 209 20 8 nbsp Slovenia 8 720 548 8 842 181 9 048 633 3 8 nbsp Slovakia 25 231 767 25 543 239 24 516 830 2 8 nbsp United Kingdom 242 513 099 251 159 840 256 581 160 5 8 Total 2 012 043 453 2 033 636 557 2 049 927 884 1 9 Figures are in tonnes of CO2 Source European Commission Press Release 23 May 2008 65 Consequently observers accused national governments of abusing the system under industry pressure and urged far stricter caps in the second phase 2008 2012 66 This led to a stricter regime in the second phase Phase II 2008 12 editScope edit The second phase 2008 12 expanded the scope of the scheme significantly In 2007 three non EU members Norway Iceland and Liechtenstein joined the scheme 67 The EU s Linking Directive introduced the CDM and JI credits Although this was a theoretical possibility in phase I the over allocation of permits combined with the inability to bank them for use in the second phase meant it was not taken up 68 During Phases I and II allowances for emissions have typically been given free to firms which has resulted in them getting windfall profits 69 Ellerman and Buchner 2008 suggested that during its first two years in operation the EU ETS turned an expected increase in emissions of 1 2 per year into a small absolute decline Grubb et al 2009 suggested that a reasonable estimate for the emissions cut achieved during its first two years of operation was 50 100 MtCO2 per year or 2 5 5 70 On 27 April 2012 the European Commission announced the full activation of the EU Emissions Trading System single registry The full activation process included the migration of over 30 000 EU ETS accounts from national registries The European Commission further stated that the single registry to be activated in June will not contain all the required functionalities for phase III of the EU ETS 71 Phase II saw some tightening but the use of JI and CDM offsets was allowed with the result that no reductions in the EU will be required to meet the Phase II cap 69 For Phase II the cap is expected to result in an emissions reduction in 2010 of about 2 4 compared to expected emissions without the cap business as usual emissions 72 Aviation emissions edit Aviation emissions were to be included from 2012 73 The inclusion of aviation was considered important by the EU 74 The inclusion of aviation was estimated to increase in demand for allowances by about 10 12 million tonnes of CO2 per year in phase two According to DEFRA an increased use of JI credits from projects in Russia and Ukraine would offset any increase in prices so there would be no discernible impact on average annual CO2 prices 75 The airline industry and other countries including China India Russia and the United States reacted adversely to the inclusion of the aviation sector 76 The United States and other countries argued that the EU did not have jurisdiction to regulate flights when they were not in European skies China and the United States threatened to ban their national carriers from complying with the scheme On 27 November 2012 the United States enacted the European Union Emissions Trading Scheme Prohibition Act of 2011 which prohibits U S carriers from participating in the European Union Emission Trading Scheme 77 78 China threatened to withhold 60 billion in outstanding orders from Airbus which in turn led to France pressuring the EU to freeze the scheme 79 The EU insisted that the regulation should be applied equally to all carriers and that it did not contravene international regulations In the absence of a global agreement on airline emissions the EU argued that it was forced to go ahead with its own scheme But only flights within the EEA are covered international flights are not 23 Other edit Ultimately the Commission intended that the third trading period should cover all greenhouse gases and all sectors including aviation maritime transport and forestry 80 For the transport sector the large number of individual users adds complexities but might be implemented either as a cap and trade system for fuel suppliers or a baseline and credit system for car manufacturers 81 The National Allocation Plans for Phase II the first of which were announced on 29 November 2006 provided for an average reduction of nearly 7 below the 2005 emission levels 82 However the use of offsets such as Emission Reduction Units from JI and Certified Emission Reductions from CDM projects was allowed with the result that the EU would be able to meet the Phase II cap by importing units instead of reducing emissions CCC 2008 pp 145 149 83 According to verified EU data from 2008 the ETS resulted in an emissions reduction of 3 or 50 million tons At least 80 million tons of carbon offsets were bought for compliance with the scheme 84 In late 2006 European Commission started infringement proceedings against Austria Czech Republic Denmark Hungary Italy and Spain for failure to submit their proposed National Allocation Plans on time 85 In July 2020 The Environment Committee of the European Parliament voted to include CO2 emissions from the maritime sector in the European Union EU Emissions Trading System ETS 86 starting in January 2024 with ships over 5 000 GT 87 State allocation plans edit The annual Member State CO2 yearly allowances in million tonnes are shown in the table Million tonnes of CO2 yearly allowances 88 Member State 1st periodcap 2005 verifiedemissions 2008 2012 cap State request Cap allowed nbsp Austria 33 0 33 4 32 8 30 7 nbsp Belgium 62 1 55 58 a 63 33 58 5 nbsp Bulgaria 42 3 40 6 67 6 42 3 nbsp Cyprus b 5 7 5 1 7 12 5 48 nbsp Czech Republic 97 6 82 5 101 9 86 8 nbsp Denmark 33 5 26 5 24 5 24 5 nbsp Estonia 19 12 62 24 38 12 72 nbsp Finland 45 5 33 1 39 6 37 6 nbsp France 156 5 131 3 132 8 132 8 nbsp Hungary 31 3 26 0 30 7 26 9 nbsp Germany 499 474 482 453 1 nbsp Greece 74 4 71 3 75 5 69 1 nbsp Ireland 22 3 22 4 22 6 21 15 nbsp Italy 223 1 222 5 209 195 8 nbsp Latvia 4 6 2 9 7 7 3 3 nbsp Lithuania 12 3 6 6 16 6 8 8 nbsp Luxembourg 3 4 2 6 3 95 2 7 nbsp Malta b 2 9 1 98 2 96 2 1 nbsp Netherlands 95 3 80 35 c 90 4 85 8 nbsp Poland 239 1 203 1 284 6 208 5 nbsp Portugal 38 9 36 4 35 9 34 8 nbsp Romania 74 8 70 8 95 7 75 9 nbsp Slovakia 30 5 25 2 41 3 30 9 nbsp Slovenia 8 8 8 7 8 3 8 3 nbsp Spain 174 4 182 9 152 7 152 3 nbsp Sweden 22 9 19 3 25 2 22 8 nbsp United Kingdom 245 3 242 4 d 246 2 246 2 Totals 2298 5 2122 16 2325 34 2080 93 Including installations opted out in 2005 a b Cyprus and Malta as new EU accession states but not Annex I countries will have their own NAPs and participate in trading during Phase II Verified emissions for 2005 do not include installations opted out in 2005 which will be covered in 2008 and 2012 and are estimated to amount to some 6 Mt UK s verified emissions for 2005 do not include installations opted out in 2005 which will be covered in 2008 and 2012 and are estimated to amount to some 30 Mt Carbon price edit The carbon price 89 within Phase II increased to over 20 tCO2 in the first half of 2008 CCC 2008 p 149 The average price was 22 tCO2 in the second half of 2008 and 13 tCO2 in the first half of 2009 CCC 2009 p 67 gave two reasons for this fall in prices 90 Reduced output in energy intensive sectors as a result of the recession This means that less abatement will be required to meet the cap lowering the carbon price The market perception of future fossil fuel prices may have been revised downwards Projections made in 2009 indicate that like Phase I Phase II would see a surplus in allowances and that 2009 carbon prices were being sustained by the need to bank allowances to surrender them in the tougher third phase 48 In December 2009 carbon prices dropped to a six month low after the Copenhagen climate summit outcome disappointed traders Prices for EU allowances for December 2010 delivery dropped 8 7 to 12 40 euros a tonne 91 In March 2012 according to the periodical Economist the EUA permit price under the EU ETS had tanked and was too low to provide incentives for firms to reduce emissions The permit price had been persistently under 10 per tonne compared to nearly 30 per tonne in 2008 The market had been oversupplied with permits 92 In June 2012 EU allowances for delivery in December 2012 traded at 6 76 euros each on the Intercontinental Exchange Futures Europe exchange a 61 percent decline compared with a year previously 93 In July 2012 Thomson Reuters Point Carbon stated that it considered that without intervention to reduce the supply of allowances the price of allowances would fall to four Euros 94 The 2012 closing price for an EU allowance with a December 2013 contract ended the year at 6 67 euros a tonne 95 In late January 2013 the EU allowance price fell to a new record low of 2 81 euros after the energy and industry committee of the European parliament opposed a proposal to withhold 900 million future dated allowances from the market 96 Phase III 2013 2020 editFor Phase III 2013 2020 the European Commission implemented a number of changes including CCC 2008 p 149 83 the setting of an overall EU cap with allowances then allocated to EU members tighter limits on the use of offsets limiting banking of allowances between Phases II and III a move from allowances to auctioning and the inclusion of more sectors and gases Also millions of allowances set aside in the New Entrants Reserve NER to fund the deployment of innovative renewable energy technologies and carbon capture and storage through the NER 300 programme one of the world s largest funding programmes for innovative low carbon energy demonstration projects 97 The programme is conceived as a catalyst for the demonstration of environmentally safe carbon capture and storage CCS and innovative renewable energy RES technologies on a commercial scale within the European Union 98 Ahead of its accession to the EU Croatia joined the ETS at the start of Phase III on 1 January 2013 99 100 This took the number of countries in the EU ETS to 31 On 4 January 2013 European Union allowances for 2013 traded on London s ICE Futures Europe exchange for between 6 22 euros and 6 40 euros 101 The number of excess allowances carried over banked from Phase II to Phase III was 1 7 billion 102 Phase IV 2021 2030 editPhase IV commenced on 1 January 2021 and will finish on 31 December 2030 103 The European Commission plans a full review of the Directive by 2026 Since 2018 prices have continuously increased reaching 57 tCO2 67 in July 2021 104 This results in additional costs of about 0 04 kWh for coal and 0 02 kWh for gas combustion for electricity Reform of the EU ETS and introduction of the Market Stability Reserve MSR edit On 22 January 2014 the European Commission proposed two structural reform amendments to the ETS directive 2003 87 EC of the 2008 Climate Package to be agreed on in the Council Conclusions 105 on 20 21 March 2014 by the Heads of EU Member States at the meeting of the European Council 106 the linear reduction factor at which the overall emissions cap is reduced from 1 74 2013 2020 to 2 2 each year from 2021 to 2030 thus reducing EU CO2 emissions in the ETS sector by 43 compared to 2005 107 the creation of a 12 automatic set aside reserve mechanism of verified annual emissions at least a 100 million CO2 permit reserve in the fourth ETS period from 2021 to 2030 thus creating a quasi carbon tax or carbon price floor with a price range set each year by the European Commission s Directorate General for Climate Change 108 Connie Hedegaard the EU Commissioner for Climate Change hoped to link up the ETS with compatible systems around the world to form the backbone of a global carbon market with Australia cited as an example 26 However as the COP 19 Climate Conference again ended with no binding new international agreement in 2013 and after the election of the Liberal National government Australia dismantled its ETS system 109 Before the European Council summit on 20 March 2014 110 the European Commission decided to propose a change in the functioning of the carbon market CO2 permits The submitted legislation on the Market Stability Reserve system MSR would change the amount of annually auctioned CO2 permits based on the amount of CO2 permits in circulation 111 On 24 October 2014 at the meeting of the European Council the Heads of Governments of EU Member States provided legal certainty to the proposed Market Stability Reserve MSR by sanctioning the political project in the text of the Council Conclusions 112 This would address imbalances in supply and demand in the European carbon market by adjusting volumes for auction The reserve would operate on predefined rules with no discretion for the commission or Member States The European Parliament and the European council informally agreed on an adapted version of this proposal which sets the starting date of the MSR to 2019 so already in Phase III puts the 900 million backloaded allowances in the reserve and reduces the reaction time of the MSR to one year The adopted proposal was passed as Decision EU 2015 1814 27 by the European parliament and the Council of ministers in 2015 28 In 2023 carbon prices fell to around 70 euros per ton down from over 100 euros affecting funding for the EU Innovation Fund and highlighting the MSR s critical role in stabilizing the market 113 Reform of the Market Stability Reserve MSR edit In the years 2014 2017 the back loading of auction volumes and the legislation on introducing the MSR had neither substantially decreased the surplus of allowances nor substantially increased allowance prices in the EU ETS with EUA prices remaining below 10 tCO2 In 2018 the MSR was reformed again with Directive EU 2018 410 30 primarily to reduce the surplus of emissions allowances and create additional scarcity 114 115 For the period from 2019 to 2023 the share of allowances put into the MSR was increased from 12 to 24 From 2023 onwards all allowances in the MSR above the total number of allowances auctioned during the previous year would become invalid Unilateral invalidation of allowances by member states that take additional policy measures leading to reduced demand for EUAs This reform lead to a strong increase of EUA prices in 2018 with prices staying mostly in a range of 18 30 tCO2 from August 2018 to March 2020 Fit for 55 package edit The change in the overall EU emissions target to 55 reduction versus 1990 in the European Green Deal necessitated tightening of the EU ETS reduction target for 2030 of 43 with respect to 2005 The EU commission proposed in its Fit for 55 package to increase the EU ETS reduction target for 2030 to 61 compared to 2005 3 Such a tighter EU ETS target could increase scarcity of EUAs and thus raise EUA prices higher with modeling studies estimating carbon prices in the range of 90 130 tCO2 for 2030 116 117 The EU commission also proposed to include emissions from maritime transport in the EU ETS 3 Russian invasion of Ukraine 2022 edit The 24 February 2022 invasion sent carbon prices plunging from 97 in early February down to below 70 118 Costs editEmissions in the EU have been reduced at costs that are significantly lower than projected 48 though transaction costs are related to economies of scale and can be significant for smaller installations 119 Overall the estimated cost was a fraction of 1 of GDP It was suggested that if permits were auctioned and the revenues used effectively e g to reduce distortionary taxes and fund low carbon technologies costs could be eliminated or even create a positive economic impact Overall emission reductions editAccording to the European Commission greenhouse gas emissions from big emitters covered by the EU ETS had decreased by an average of more than 17 000 tonnes per installation between 2005 and 2010 a decrease of more than 8 120 A 2020 study found that the European Union Emissions Trading System successfully reduced CO2 emissions even though the prices for carbon were set at low prices 6 A 2023 study on the effects of the EU ETS identified a reduction in carbon emissions in the order of a 10 decrease between 2005 and 2012 The study compared regulated and unregulated companies concluding that the EU ETS had no significant impact on profits and employment and led to an increase in revenues and fixed assets for regulated companies 7 Inclusion of sinks editCurrently the EU does not allow CO2 credits under ETS to be obtained from sinks e g reducing CO2 by planting trees However some governments and industry representatives lobby for their inclusion The inclusion is currently opposed by NGOs as well as the EU commission itself arguing that sinks are surrounded by too many scientific uncertainties over their permanence and that they have inferior long term contribution to climate change compared to reducing emissions from industrial sources 121 ETS related crime editCybercrime edit On 19 January 2011 the EU emissions spot market for pollution permits was closed after computer hackers stole 28 to 30 million euros 41 12 million worth of emissions allowances from the national registries of several European countries within a few days time period The Czech Registry for Emissions Trading was especially hard hit with 7 million euros worth of allowances stolen by hackers from Austria the Czech Republic Greece Estonia and Poland A phishing scam is suspected to have enabled hackers to log into unsuspecting companies carbon credit accounts and transfer the allowances to themselves allowing them to then be sold 122 123 The European Commission said it would proceed to determine together with national authorities what minimum security measures need to be put in place before the suspension of a registry can be lifted Maria Kokkonen EC spokeswoman for climate issues said that national registries can be reopened once sufficient security measures have been enacted and member countries submit to the EC a report of their IT security protocol The Czech registry said there are still when legal and administrative hurdles to be overcome and Jiri Stastny chairman of OTE AS the Czech registry operator said that until there is recourse for victims of such theft and a system is in place to return allowances to their rightful owners the Czech registry will remain closed Registry officials in Germany and Estonia have confirmed they have located 610 000 allowances stolen from the Czech registry according to Mr Stastny Another 500 000 of the stolen Czech allowances are thought to be in accounts in the UK according to the OTE 122 123 124 Cyber fraudsters have also attacked the EU ETS with a phishing scam which cost one company 1 5 million 125 In response to this the EU has revised the ETS rules to combat crime 126 The security breaches raised fears among some traders that they might have unknowingly purchased stolen allowances which they might later have to forfeit The ETS experienced a previous phishing scam in 2010 which caused 13 European markets to shut down and criminals cleared 5 million euros in another cross border fraud in 2008 and 2009 123 VAT fraud edit In 2009 Europol informed that 90 market volume of emissions traded in some countries could be result of tax fraud more specifically missing trader fraud costing governments more than 5 billion euros 127 German prosecutors confirmed in March 2011 that value added tax fraud in the trade of carbon dioxide emissions has deprived the German state of about 850 million 1 19 billion In December 2011 a German court sentenced six people to jail terms of between three years and seven years and 10 months in a trial involving evasion of taxes on carbon permits A French court sentenced five people to one to five years in jail and to pay massive fines for evading tax through carbon trading In the UK a first trial over VAT fraud in the carbon market is put on track to start in February 2012 Views on the EU ETS editThis section s tone or style may not reflect the encyclopedic tone used on Wikipedia See Wikipedia s guide to writing better articles for suggestions May 2010 Learn how and when to remove this message This article s criticism or controversy section may compromise the article s neutrality Please help rewrite or integrate negative information to other sections through discussion on the talk page September 2014 People and organizations responded differently to the EU ETS Mr Anne Theo Seinen of the EC s Directorate General for the Environment described Phase I as a learning phase where for example the infrastructure and institutions for the ETS were set up UK Parliament 2009 128 In his view the carbon price in Phase I had resulted in some abatement Seinen also commented that the EU ETS needed to be supported by other policies for technology and renewable energy According to CCC 2008 p 155 technology policy is necessary to overcome market failures associated with delivering low carbon technologies e g by supporting research and development 83 In 2009 the World Wildlife Fund commented that there was no indication that the EU ETS had influenced longer term investment decisions 129 In their view the Phase III scheme brought about significant improvements but still suffered from major weaknesses Jones et al 2008 p 24 suggested that the EU ETS needed further reform to achieve its potential 130 A 2016 survey of German companies participating in the EU ETS found that under current trading conditions the EU ETS has generated weak incentives for participating firms to adopt carbon abatement measures 131 132 Criticisms edit The EU ETS has been criticized 133 for several points including over allocation windfall profits price volatility and in general for failing to meet its goals 134 Proponents maintain however that Phase I of the EU ETS 2005 2007 was a learning phase designed primarily to establish baselines and create the infrastructure for a carbon market not to achieve significant reductions 135 136 137 A number of design flaws have limited the effectiveness of the scheme 72 In the initial 2005 07 period emission caps were not tight enough to drive a significant reduction in emissions 69 The total allocation of allowances turned out to exceed actual emissions This drove the carbon price down to zero in 2007 This oversupply was caused because the allocation of allowances by the EU was based on emissions data from the European Environmental Agency in Copenhagen which uses a horizontal activity based emissions definition similar to the United Nations the EU ETS Transaction log in Brussels but a vertical installation based emissions measurement system This caused an oversupply of 200 million tonnes 10 of market in the EU ETS in the first phase and collapsing prices 138 In addition the EU ETS has been criticized as having caused a disruptive spike in energy prices 139 Defenders of the scheme say that this spike did not correlate with the price of permits and in fact the largest price increase occurred at a time Mar Dec 2007 when the cost of permits was negligible 137 Researchers Preston Teeter and Jorgen Sandberg have argued that it is largely the uncertainty behind the EU s scheme that has resulted in such a tepid and informal response by regulated organizations Their research has revealed a similar outcome in Australia where organizations saw little incentive to innovate and even comply with cap and trade regulations 140 Some critics in EU blamed the EU ETS for contributing to the 2021 global energy crisis 141 142 Over allocation edit There was an oversupply of emissions allowances for EU ETS Phase I This drove the carbon price down to zero in 2007 CCC 2008 p 140 83 This oversupply reflects the difficulty in predicting future emissions which is necessary in setting a cap 45 Given poor data about emissions baselines inherent uncertainty of emissions forecasts and the very modest reduction goals of the Phase I cap 1 2 across the EU it was entirely expected that according to whom the cap might be set too high 137 This problem naturally diminishes as the cap tightens The EU s Phase II cap is more than 6 below 2005 levels much stronger than Phase I and readily distinguishable from business as usual emissions levels according to whom 137 Over allocation does not imply that no abatement occurred Even with over allocation there was theoretically a price on carbon except for installations that received hundreds of thousands of free allowances For some installations the price had some effect on emitters behavior Verified emissions in 2005 were 3 4 below projected emissions 136 and analysis suggests that at least part of that reduction was due to the EU ETS 143 In September 2012 Thomson Reuters Point Carbon calculated that the first Kyoto Protocol commitment period had been oversupplied by about 13 billion tonnes 13 1 Gt of CO2 and that the second commitment period 2013 2020 was likely to start with a surplus of Assigned Amount Units AAUs 144 Windfall profits edit According to Newbery 2009 the price of EUAs was included in the final price of electricity 38 The free allocation of permits was cashed in at the EUA price by fossil generators resulting in a massive windfall gain Newbery 2009 wrote that there is no case for repeating such a willful misuse of the value of a common property resource that the country should own In the view of 4CMR 2009 all permits in the EU ETS should be auctioned 145 This would avoid possible windfall profits in all sectors Price volatility edit The price of emissions permits tripled in the first six months of Phase I collapsed by half in a one week period in 2006 and declined to zero over the next twelve months Such movements and the implied volatility raised questions about the viability of the Phase I system to provide stable incentives to emitters 137 In future phases measures such as banking of allowances auctioning and price floors were considered to mitigate volatility 146 However it s important to note that considerable volatility is expected of this type of market and the volatility seen is quite in line with that of energy commodities generally Nonetheless producers and consumers in those markets respond rationally and effectively to price signals 137 Newbery 2009 commented that Phase I of the EU ETS was not delivering the stable carbon price necessary for long term low carbon investment decisions 38 He suggested that efforts should be made to stabilize carbon prices e g by having a price ceiling and a price floor This led to the reforms outlined above in Phases II and III Main article Carbon priceOffsetting editProject based offsetting edit The EU ETS is linked to the Joint Implementation and Clean Development Mechanism projects as it allows the limited use of offset credits from them Participating firms were allowed to use some Certified Emission Reduction units CERs from 2005 and Emission Reduction Units ERUs from 2008 Each Member State s National Allocation Plan must specify a percentage of the national allocation that will be the cap on the CERs and ERUs that may be used CERs and ERUs from nuclear facilities and from Land Use Land Use Change and Forestry may not be used 147 The main theoretical advantage of allowing free trading of credits is that it allows mitigation to be done at least cost CCC 2008 p 160 83 This is because the marginal costs that is to say the incremental costs of preventing the emission of one extra ton of CO2e into the atmosphere of abatement differs among countries In terms of the UK s climate change policy CCC 2008 noted three arguments against too great a reliance on credits Rich countries need to demonstrate that a low carbon economy is possible and compatible with economic prosperity This is to convince developing countries to lower their emissions Additionally domestic action by rich countries drives investment towards a low carbon economy An ambitious long term target to reduce emissions e g an 80 cut in UK emissions by 2050 requires significant domestic progress by 2020 and 2030 to reduce emissions CDM credits are inherently less robust than a cap and trade system where reductions are required in total emissions Due to the economic downturn states have pushed successfully for a more generous approach towards the use of CDM JI credits post 2012 148 attribution needed The 2009 EU ETS Amending Directive states that credits can be used for up to 50 of the EU wide reductions below the 2005 levels of existing sectors over the period 2008 2020 149 Moreover it has been argued that the volume of CDM JI credits if carried over from phase II 2008 2012 to phase III 2013 2020 in the EU ETS will undermine its environmental effectiveness despite the requirement of supplementarity in the Kyoto Protocol 150 In January 2011 the EU Climate Change Committee banned the use of CDM Certified Emission Reduction units from HFC 23 destruction in the European Union Emissions Trading Scheme from 1 May 2013 The ban includes nitrous oxide N2O from adipic acid production The reasons given were the perverse incentives the lack of additionality the lack of environmental integrity the under mining of the Montreal Protocol costs and ineffectiveness and the distorting effect of a few projects in advanced developing countries getting too many CERs 151 Buying and deleting emissions allowances edit As an alternative to CDM and JI projects emissions can be offset directly by buying and deleting emissions allowances inside the ETS This is a way to avoid several problems of CDM and JI such as additionality measurement leakage permanence and verification 152 Buying and cancelling allowances allows to include more emissions sources in the ETS such as traffic Furthermore it reduces the available allowances in the cap and trade system which means that it reduces the emissions that can be produced by covered sources 153 See also edit nbsp Energy portal Carbon emission trading Carbon finance Carbon tax Energy policy of the European Union European Climate 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