The EU Emissions Trading System (EU ETS) is a market-based tool created to help the European Union (EU) reach its goal of reducing greenhouse gas emissions by 55% by 2030 compared to 1990. This aligns with the EU’s goal of achieving carbon neutrality by 2050.
How does it work?
The EU ETS sets a cap on the total amount of greenhouse gases that specific industries and power plants, such as energy production and heavy industry, can emit. This cap is gradually lowered over time to ensure that emissions are reduced in line with the EU’s climate goals. Companies that emit less than their allocated amount of greenhouse gases can sell their unused allowances to companies that need more budgets to cover their emissions. This creates a market for greenhouse gas emissions, incentivizing companies to reduce their emissions to avoid buying allowances.
The EU ETS operates on a “cap and trade” system, where the cap on emissions limits the total amount of emissions. In contrast, the trade-in allowances enable companies to find the most cost-effective ways to reduce their emissions.
What is changing with the "Fit for 55" package?
The EU has recently proposed a new set of policies called the “Fit for 55” package, which includes several changes to the EU ETS. The key differences are:
- A more ambitious emissions reduction target: The EU aims to reduce greenhouse gas emissions by at least 55% by 2030, compared to 1990. This is an increase from the previous target of a 40% reduction.
- The extension of the EU ETS to new sectors: The EU ETS will now include the maritime industry, which was previously excluded. It will also be extended to cover emissions from buildings and road transport, although this will be phased in gradually.
- A tightening of the cap: The cap on emissions will be lowered more quickly, with an annual reduction of 4.2% compared to the current rate of 2.2%.
- The creation of a new market stability reserve: A new mechanism will be created to manage the supply of allowances in the market, aiming to stabilize prices and avoid large fluctuations.
- The introduction of a carbon border adjustment mechanism will require importers of certain goods, such as steel and cement, to pay for the carbon emissions associated with their production if the exporting country does not have similar climate policies in place.
What are the benefits of the EU ETS?
The EU ETS has several benefits:
- It encourages companies to reduce greenhouse gas emissions by creating a financial incentive.
- It is a cost-effective way of reducing emissions, as companies can choose the most cost-effective way to reduce their emissions.
- It helps to create a level playing field for companies across the EU, as they are all subject to the same emissions cap.
- It generates revenue for the EU, which can be used to fund climate-related projects.
Conclusion:
The EU ETS is essential in the EU’s efforts to reduce greenhouse gas emissions and combat climate change. With the “Fit for 55” package, the EU is making the system even more ambitious, with new sectors included and raising the emissions reduction target. This will help ensure the EU is on track to meet its climate goals and lead the way in the fight against climate change.
