The EU introduced the first-ever greenhouse gas emissions trading scheme in 2005: the European Union Emission Trading System or EU ETS for short. Accounting for almost 50% of the EU’s total greenhouse gas emissions, it is often referred to as the cornerstone of European climate policy. The EU ETS covers the power sector, heavy industry and continental flights. Heavy industry in turn consists, for example, of companies in the chemical, metal and stone industries.
The EU ETS has now been in operation for almost two decades. In these 20 years, the system has endured a number of profound economic, political and social changes. For instance, we faced a global economic crisis in 2008, the Paris Agreement was signed in 2015, after which global climate policy really gained momentum, and we faced a pandemic in 2020. In all this time, the core of the EU ETS remained intact: emissions are priced and GHG emissions from ETS sectors decline to zero.
An (international) emissions trading system with a decreasing number of emission allowances is one of the most cost-efficient ways to reduce emissions. A predetermined decreasing emissions cap gives companies certainty that emissions across the sector must go to zero. At the same time, participating parties can trade allowances among themselves, creating a price for allowances. That price ensures that emissions are reduced where it is cheapest to do so. Moreover, emission rights are becoming increasingly scarce. This creates upward price pressure on the market from the supply side. Following the EU’s lead, other countries and regions in different parts of the world have also set up emissions trading systems for greenhouse gas reductions.
Currently, the policy framework is such that no more allowances will be issued from 2040 onwards. So the system has been operating for about 20 years, and will serve for at least 15 more under current plans. In recent years the system’s emission cap has been reduced more quickly than ever before. Furthermore, voices are already emerging in the current debate for a lifetime extension of the ETS beyond 2039. This could eventually create a market for negative emissions.
Over 20 years, the EU ETS has made an indispensable contribution to the energy transition. The system has ensured that the cheapest emission reduction options have taken place. This inherently also means that the necessary more expensive choices for emission reduction have yet to take place. The emission price is guiding these choices. From 2027, a second, stand-alone emissions trading system will come into force: ETS-2. This ETS will oversee emission reductions from the transport sector, the built environment and smaller industry.
This thematic report provides an overview of the historical policy and price developments of the EU ETS. In addition, it provides interpretation on sustainability within the EU ETS and what possible implications there may be for the market. Finally, it provides insight into developments regarding ETS-2.