“The leading role of emissions trading should be further solidified”

This is indeed the highest that allowance prices have been since emissions trading was introduced in 2005. But it won’t stay the all-time high for long: as the global economy improves significantly in the aftermath of the coronavirus pandemic, the price is likely to rise even further – particularly if the European Union and its member states take their climate targets seriously.

No. This is mainly the result of the EU’s stricter climate targets: by 2030, greenhouse gas emissions in the European Union are now to be reduced by 55%  compared to 1990, rather than by 40%. I, like many of my colleagues, consider this to be extremely ambitious. After all, the 40% target was already going to be a challenge.

This is clearly the consequence of regulatory changes to EU emissions trading aimed at reducing the large number of surplus allowances, which have been building up for some years now. The market stability reserve, introduced in 2019 and to which surplus certificates are temporarily transferred for a period of time, has contributed to this shift. In some cases, these allowances are actually permanently deleted when a certain threshold for the number of transferred allowances is exceeded.

The market stability reserve has certainly played a big part in increasing prices, but repeated assertions by politicians that they are getting serious about climate protection and, above all, the stricter EU emissions target have undoubtedly also had an impact.

There was undoubtedly a considerable surplus of pollution permits, which was, in part, due to design flaws. However it was also partly due to the poor economic situation after the financial crisis in 2008. In this instance, low allowance prices helped dilute the economic fallout of the crisis without jeopardising the positive impact that emissions trading has on reducing emissions. That being said, once these teething problems have been ironed out and now that climate targets have become stricter, a continued surplus of allowances will be unlikely – even despite the economic consequences of the coronavirus pandemic.

This climate policy instrument has proven highly successful. While the EU has reduced its overall emissions by around 25% since 2005, sectors participating in the EU ETS have managed to reduce their emissions by 35%. This is largely thanks to the power generation sector. By way of comparison: emissions in the transport sector, which is not covered by emissions trading, have since stagnated.

Emissions trading plays a leading role in emissions reduction in Europe, and this position should be further solidified by integrating other sectors such as transport and agriculture. However, all EU members will need to agree on this, which can take time. So, in the meantime, Germany should submit a request to allow its recently launched national emissions trading, which applies to transport and buildings, to be integrated into the EU emissions trading scheme. This would have the particular advantage that the 2030 emissions target in non-ETS sectors of achieving a net reduction in greenhouse gas emissions versus 1990 of at least 38% would no longer apply to Germany. This target is binding under EU law and would result in billions of euros in annual fees in the event of non-compliance – which is a highly likely outcome.