The EU ETS and why we need it?

Tassos Chatzieleftheriou, Energy Policy Analyst at The Green Tank, writes about the European Union’s Emissions Trading System (EU ETS) in OIKOTOPIA’s special feature on energy.

In his article Tassos Chatzieleftheriou explains the function of the EU ETS, its contribution to the reduction of greenhouse gas emissions and how it relates to the energy price crisis that started in 2021 with the soaring costs of fossil gas supply and was intensified with the Russian invasion of Ukraine.

In line with the “the polluter pays” principle, the main function of the EU ETS is that it “sets a carbon price that polluters must pay, thereby creating incentives to reduce emissions”. As the article highlights, a total annual emissions cap is initially set for all economic activities included in the EU ETS – electricity/heat production, energy-intensive industry and intra-EU aviation. These emissions are then translated into emission allowances/permits (1 permit = 1 tonne of carbon dioxide (CO2)) and they are either auctioned or allocated for free.

This mechanism is considered not only environmentally necessary but also cost-effective. It has thus turned into a key EU policy tool for the achievement of climate targets, namely the reduction of net greenhouse gas emissions by at least 55% compared to 1990, by 2030, and climate neutrality by 2050, combined with the rapid penetration of renewable energy sources and the reduction of their costs.

However, as noted, the EU ETS shows shortcomings that have undermined its effectiveness, among which the free emission allowances, which, to this date, have exceeded even the actual emissions of industries.

The article also comments on the forthcoming revision of the EUETS Directive. In the context of this revision, a significant increase in the climate ambition of the EU ETS sectors has been proposed in order to align this mechanism with the EU’s overall 2030 target. The European Commission has proposed its expansion to other sectors of the economy, such as shipping, buildings and road transport. As Tassos Chatzieleftheriou points out, “it is estimated that through such expansions, 70-75% of EU greenhouse gas emissions will be subject to an emissions trading system”.

Despite some initial shortcomings in its operation, greenhouse gas emissions have been reduced by 42.3% in the sectors covered by the EU ETS. However, a stronger climate ambition is needed in order to work effectively as a counterweight to climate change. The article concludes that both the phase out of free allowances and the expansion of sectors covered by the ETS will significantly enhance the chances of achieving EU’s climate target and together the hope of halting the climate threat.

The article was published in the website of OIKOTOPIA, on April 03, 2022.

OIKOTOPIA is a Greek magazine on ecology, published online. The article is part of the special issue #4 “Special feature on energy”.

The article is available here in Greek.