Reform keeps EU emissions trade on track to success

Since the EU Commission decided to reform the emissions trading system in November 2017, the price of CO₂ allowances has more than doubled. The authors of the “2018 State of the EU ETS Report”, published by the International Centre of Trade and Sustainable Development (ICTDS), already see signs that the historical surplus of emission allowances will come to an end, even though the changes will only come into force in 2020. In the past, various factors such as economic crises and overlapping legislation in the EU member states had led to this oversupply, which has gone hand in hand with very low prices for allowances.

According to the authors, the goal of the 34-page report is to review the functionality of the EU ETS. On the whole, the ICTDS study takes a positive view of the emissions trading system, as do the EU Commission and Germany’s Federal Ministry of the Environment: the key mechanisms are functioning as envisaged.

The sectors involved in the system had reduced their emissions of greenhouse gases, with progress occurring even faster than planned. The steady rise in the number of participants at ETS auctions and the generally high level of liquidity on the certificates market are also indicators that the market is functioning, also in the sense that emissions are being reduced where it is possible in the most cost-effective manner. According to the report, decarbonisation has made significant progress in the energy sector, while emission allowances have mainly been used in the energy-intensive industrial sector, where emission avoidance results in much higher costs.

Even though the researchers find that emissions trading is now functioning better than it was a year ago, they point out some aspects which will need to be taken into consideration in the future in order to maintain the functionality of the EU ETS with regard to climate targets and economic viability. For instance, the system must be protected from intervention or subversion by politics. One example of this is the possible deviation from the principle of technology neutrality. This might mean that in the future costs will no longer decide where a certain amount of CO₂ emissions will be avoided, but rather the technology of the facility. To be more specific: this would be the case, for example, if the use of coal for electricity generation is banned, even if the reduction of the same amount of CO₂ would be cheaper in other areas.

According to the researchers, the reform of the EU ETS was yet another efficient step towards reducing emissions of greenhouse gases in the EU.