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The EU’s carbon market is back.
After years on the sidelines of the EU’s regulatory machinery, where it was largely written off, the Emissions Trading System (ETS) has returned as the cornerstone of the bloc’s climate policy.
Brussels is betting that a major overhaul of the cap-and-trade scheme — set to be presented as part of its mammoth Fit for 55 climate policy package on Wednesday — will speed up emissions reductions, incentivize companies to invest in clean technologies and help the bloc achieve its ambitious climate targets.
It’s a big bet.
A pioneering system when it was first launched in 2005, the carbon cap-and-trade scheme — which caps the emissions of more than 10,000 power plants and factories and makes them pay to pollute — quickly ran into trouble: A glut of low-priced permits and an overly generous emissions cap following the 2008 financial crisis meant that many companies weren’t hit hard enough to change their behavior. As Brussels scrambled to fix it, countries and companies went their own way, diluting the market’s effectiveness.
The European Commission’s reform proposal aims to extend the scheme, which currently covers some 40 percent of emissions, to most emissions in the bloc. That would make it more expensive for large swathes of Europe’s industry — from steel and cement to power plants and transport — to pollute, and help the bloc meet its steeper 2030 goal of reducing emissions by 55 percent and reach net zero by 2050.
“People lost trust in the ETS because it didn’t work. Now it works,” said German MEP Peter Liese, the environmental spokesperson for the European People’s Party, the largest group in the European Parliament. “I’ve fought for many legislations [but] the step to 55 percent is so huge that we cannot do it by regulation [alone]. We really need to invest in the market,” he said.
Wednesday’s proposal will look to further squeeze the total number of permits, expand the scheme to new parts of the economy such as maritime shipping, and impose tougher conditions on aviation, according to drafts seen by POLITICO. A separate, “adjacent” trading system would slap a carbon price on heating and road transport fuels.
“It’s clear: We need to reach our climate goals,” Commission President Ursula von der Leyen told German daily Süddeutsche Zeitung on the eve of the proposal. “If not through the ETS, then through another way, which means more regulation, more standards, more interim steps and more taxes. In that case, I prefer a system that’s betting on the market. It leaves industry and the economy more space to get creative and find its own solutions.”
The EU’s push to reboot the carbon market comes as prices continue to climb, as a result of previous reform efforts and the pressure of tougher climate legislation. Currently at around €50 per ton of emitted carbon, analysts suggest prices could rise to up to €100 by the end of this decade. The reformed system is set to become an ever more lucrative revenue source for EU countries — and, potentially, the Commission.
The scheme is “entering a new era” and is no longer “haunted by these ghosts from the past,” said Ingvild Sørhus, lead carbon analyst for Refinitiv. “It has proven that a high CO2 price is delivering actual emission reductions,” she added, and forced companies to realize they must “plan how to position themselves in a low carbon future.”
Trouble ahead
Still, Brussels’ market enthusiasm has skeptics.
The Commission’s plans to extend emissions trading to the building and road transport sectors have drawn fire from across the Continent, temporarily uniting politicians from Poland, France and Luxembourg, as well as NGOs and consumer groups, over concerns that the reform will raise prices for consumers and hit poorer households hardest.
“The risk remains that it’s unfair,” said Dimitri Vergne, sustainability lead at the consumer group BEUC. Brussels should “go for sector-specific measures” such as stronger CO2 targets for carmakers, tougher energy efficiency requirements or an ambitious renovation strategy, rather than extending the ETS, he said.
Other campaigners worry the reform will leave some of the bloc’s major polluters — such as the steel, cement and chemicals industries — largely off the hook by continuing to hand over free emission permits.
“The heart of the matter [is] who pays for the carbon pollution in the European carbon market,” said Sam Van den plas, policy director at Carbon Market Watch.
The Commission is arguing that its mix of more than a dozen interconnected policy proposals — from a carbon border tax to green standards and energy efficiency rules — will help to spread the costs while shielding vulnerable groups from rising prices.
But those are just proposals: The big question will be whether Brussels’ carbon market bet will survive the political negotiations with EU countries and the Parliament.
Bas Eickhout, the vice chair of the Greens group in the Parliament, worries that the Commission’s focus on the carbon market takes the pressure off capitals, which are wary of implementing costly and possibly unpopular national emission reduction targets.
“There are all kinds of reasons why the ETS is such an important instrument for the European Commission, however, it threatens to lead to complacency at the national capital level,” he said, adding that recent achievements in expanding the use of clean energy were largely driven by other factors, including renewable energy targets.
“In the end, we will not get to climate neutrality if member states aren’t fully on board with policy.”
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