The European Union Emissions Trading System, ETQE-EU or EU-ETS (Emissions Trading System), is the largest carbon market in the world. In 2023, 518 Mt of CO2 were sold at an average price of €84, generating an income of €33 billion. Inspired by the American Acid Rain Program, established to combat acid rain, it uses the cap and trade mechanism, or cap and trade in emissions.
Since 2005, the EU-ETS has set a ceiling on the total annual quantity of greenhouse gas emissions of the installations concerned on European soil. Quotas are issued by the Member States and can then be resold on a secondary market. Without sufficient quotas, companies risk paying fines: €100 per ton exceeded, an amount indexed to inflation since 2012 (around €120 at the beginning of 2024). Currently, more than half of the quotas are auctioned, while the rest are awarded free of charge or placed in the Market Stability Reserve, created in 2017 to allow the volume of allowances issued to be adjusted according to growth in the EU.
The ETS has gone through several revisions and development phases:
Stage 1 (2005 - 2007): Pilot phase for the 27 EU member states
Scope: Power generation installations and industries with high energy demand
Phase 2 (2008 - 2012): Iceland, Norway, Liechtenstein join the ETS
Scope: Phase 1 with the integration of civil aviation from 2012
Phase 3 (2013 - 2020): Emission allowances are auctioned three times a week with the gradual reduction of the free portion and their ceiling
Scope: Opening up to new industrial sectors such as aluminum, petrochemicals and othersIncrease in the carbon price due to a change in supply (creation of the Stability Reserve ⇒ multiplication of the price by 4 in one year, from 5 to 20€)
Stage 4 (2021 - 2030): Marked by the Fit for 55 plan, which includes a stronger reduction in the quota ceiling, from 2.2% to more than 4.2% per year, i.e. a total reduction of 62% compared to the 2005 ceiling.
During these 4 phases, CO2 emissions in the sectors concerned were almost divided by 2, with a price starting at around €20/t, then exceeding the €100 mark after the Covid period and then falling back to around €70/t currently.
The sectors most prone to carbon leakage receive a higher share of free quotas to maintain their competitiveness. The Carbon Border Adjustment Mechanism (CBAM) will also help alleviate this problem by setting a price for carbon emitted during the production of carbon-intensive goods arriving in the EU, as these free quotas will gradually disappear until they are eliminated in 2034.
The Fit for 55 plan also provides that all state revenues from the sale of quotas be allocated to climate change mitigation activities. As of 2024, maritime transport will enter the system, including 100% of emissions from intra-Community travel, and 50% for a trip to or from the EU. Aviation will see its free quotas gradually become chargeable - until completely paid in 2026 - by including greenhouse effect reporting excluding CO2 from 2025. Flights departing or arriving outside the EU will be integrated through CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation), a global system aimed at achieving carbon neutrality since 2021.
Finally, the ETS2 system, operational by 2027, concerns the building and road transport sectors. Since these sectors directly affect household final consumption, ETS 2 was designed to avoid too heavy a financial impact on them. The ETS 2 system is therefore separate from the previous system, with its own rules. For example, CO2 emissions are no longer counted at the end consumer level, but at the energy supplier level. We talk about an “upstream” system. The EU ETS is asserting itself as a crucial tool, past but also future, for European decarbonization.
Image Credit: Sustainable Ships