European greenhouse gas emissions have fallen by 15.5% in 2023 as the price of pollution increases sharply under the EU’s flagship climate policy.
Cap and Trade: What is the Emissions Trading System?
The European Emissions Trading System (ETS) is a so-called “cap and trade system” launched back in 2005 and the largest of its kind in the world. A “cap and trade” system consists of setting a limit or “cap” on the amount of permitted emissions, and then allowing a free trade of emission permits. Under the European policy, this cap is then reduced year-on-year
The policy achieves two things. Firstly and most obviously, it creates a cost for emissions which companies must take into account in their business decisions. Secondly, unlike a tax on pollution, the trading system allows some companies to purchase more permits and others to sell them off. As emissions are much cheaper and easier to minimise in some sectors than others, a trading system thus concentrates emissions in the industries where they are most necessary and unavoidable, and begins eliminating emissions where this is easiest, lending the efficiency of the free market to climate policy.
History and Challenges of the Policy
Despite its implementation in 2005, the ETS has not historically been particularly effective at curbing emissions. While Phase 1 was a successful pilot for the emissions market, it covered only a limited sector and an excess of emissions allowances were allocated for free. Phase 2, starting in 2008, expanded the policy, but suffered from similar problems to Phase 1. As each member state set their own National Allocation Plans, they were incentivised to set lenient targets for fear of disadvantaging their economies compared to other member states.
Since 2013, under Phase 3 of the scheme, National Allocation Plans have been replaced with a single Union-wide cap and auctioning has become the primary method of permit allocation. Despite this, prices have historically been low, hovering around 5€, leading to the introduction of the Market Stability Reserve. Rather than being auctioned off, allowances could be placed in reserve, effectively decreasing the supply of allowances on the market, which succeeded in bringing prices up to over 40€.
On Track for Net Zero?
The carbon price per tonne nowadays is closer to 70€, and even reached over 100€ back in December of 2023, despite pre-pandemic prices having fallen to a mere 20€. In terms of GHGs, sectors covered by the policy have reduced their emissions by 47% since 2005.
With these achievements and the Commission’s tightening of the ETS scheme, the Union seems well poised to hit its climate targets, a 55% reduction by 2030 and net zero by 2050.
However, it may be too early to celebrate, as the European elections this June may throw a wrench in such plans. Right-wing anti-climate parties projected to make significant gains, and even members of the commissioner-president’s own European People’s Party have also begun to dissent against climate policies.
TEXT: Gergely Kozár
IMAGE: Pexels, Creative Commons