A brief introduction to the EU Emissions Trading System

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In light of growing concerns about climate change, the European Union has vowed to become carbon-neutral by 2050. Its strategy to reach this goal is wrapped around actions reducing emissions by increasing energy efficiency and focusing on innovations allowing to make our current system greener. Integrated into this plan, the EU has implemented the EU Emissions Trading System (EU ETS), a crucial organ to incentivise firms to increase their efficiency. However, such a smart system may also represent drawbacks that could prevent the EU from reaching its goals.

A seven-fold strategy for climate-neutrality

The EU is aiming to reach climate neutrality by 2050, that is to have net-zero GHG emissions. Having net-zero GHG emissions does not imply necessarily no emission at all, but rather that the little amount of GHG emissions produced is being captured or offset.

In order to reach this goal, the EU has developed a strategy wrapped around 7 main ideas.

1. Energy efficiency – This focuses on reducing emissions through the development of more efficient and innovative energy consumption patterns.

2. Development of renewables – Production of green and clean energy is crucial in providing the necessary energy while decreasing GHG emissions.

3. Clean, safe and connected mobility – As the mobility means represent a quarter of the EU’s GHG emissions, improving the current network and means is crucial to reduce total emissions.

4. Competitive industry and circular economy – This focuses on reducing emissions through recycling, innovation in industrial production and focus on consumption environmental footprint.

5. Infrastructure and interconnection – Due to the importance of infrastructures and interconnections, developing innovations in these fields is necessary to reach the climate neutrality target by 2050.

6. Bioeconomy and carbon sinks – This focuses on changes in the agricultural sector in order to accommodate population growth while preserving the ecosystem.

7. Carbon Capture Storage (CCS) for remaining emissions.

The first 6 blocks mainly rely on innovations and solutions that would allow the EU to reduce its total emissions. As such, they focus on improving our current system and making it more efficient with regards to the total emissions. On the other hand, the 7th block offers a solution to deal with the remaining emissions; indeed, as producing no GHG emission may be unrealistic, the EU needs to develop alternatives to offset its emissions in order to reach carbon-neutrality.

A cooperative effort

The EU was born out of the idea that countries are better together, and that cooperation is key in order to tackle the various challenges of our century. Whether it is trade or human rights, cooperation among all agents is necessary in order to hold enough power to make a change. This idea is even more true when considering the emergency of the climate crisis.

As presented in the 7-fold strategy, reaching climate neutrality will require an effort from all agents in every sector. Accountability, trust and cooperation among all participants are necessary to have a successful transition into a greener society. Such cooperative spirit in the fight against climate change can be seen in the EU Emissions Trading System (EU ETS).

A system that caps the total emission volume

In reaching its goal of reducing total GHG emissions, the EU implements a yearly GHG emission cap, which are levels of GHG emissions that European industries are not supposed to go beyond. In the failing case, firms emitting above the threshold would have to pay a fine. That way, the EU is incentivising firms to invest in more efficient and less polluting ways to produce.

However, the EU is only interested in the total GHG emissions; which firm is polluting and which firm is not is not so relevant in the fight against climate change. The goal of the EU is to reduce total GHG emissions, not necessarily to ensure that such reduction is homogeneous across agents. As such, the EU has developed the EU Emission Trading System.

The EU ETS is a “cap and trade” system, where GHG emissions are capped and non-used emissions can be traded. In other words, the EU ETS offers a platform where firms emitting less than what they are allowed to can trade with firms that would need to emit more than they are allowed.

How does it work? The EU ETS issues allowances, which are rights to produce GHG emissions. These allowances are allocated between participants, whether through a free allocation or an auction system. Then, participants can trade their allowances surplus against financial payment. For instance, a firm A may emit less than it is allowed, while a firm B may need to emit more than it is allowed; the EU ETS offers a platform for firm A and B to meet and trade, where firm A will give its allowance to emit to firm B in exchange of money. That way, total GHG emissions remain under the cap and GHG emissions allowances are allocated efficiently among participants.

Pricing and GHG Emissions

The system offered by the EU ETS seems ideal; firms that emit less may compensate for the harmful impact of firms that emit more as long as they get a financial compensation. In a way, firms that are more efficient – with respect to GHG emissions – are being rewarded, thereby further incentivising firms to invest in technologies allowing them to reduce their emissions. Moreover, revenues generated through the EU ETS auction system are used for GHG emission reduction purposes, thereby making the whole system focused on reducing total emissions.

However, while this system may present several advantages and attractive aspects, it is worth noting that it may set a dangerous precedent where the ability to pollute has a price – and thus, anyone who has the ability to pay can pollute. Whether it is to buy allowances from other firms or to pay the fine, this system may still allow firms with enough power to not pull their weight in the fight against climate change. Perhaps it is worth wondering whether participating in saving our future should have a price.