The EU introduced the first-ever greenhouse gas emissions trading system in 2005: the European Union Emission Trading System or EU ETS for short. Accounting for nearly 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 twenty years, the system has endured a number of profound economic, political and social changes. For example, 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 that time, the core of the EU ETS remained intact: Emissions are priced and GHG emissions from ETS sectors fall to zero.
An (international) emissions trading system with a decreasing number of emission allowances is one of the most cost-effective ways to reduce emissions. A predetermined decreasing emissions cap provides companies with 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 from the supply side of the market. Following the example of the EU, other countries and regions in various parts of the world have now set up emissions trading systems for reducing greenhouse gases.
Currently, the policy framework is such that no more allowances will be issued from 2040. So the system has been operating for about 20 years, and under current plans it will serve for at least another 15 years. The system's emissions cap never dropped as much as it is now. Voices are also already emerging in the current debate for a lifetime extension of the emissions trading system 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 emissions price is guiding this. A second, stand-alone emissions trading system will come into effect from 2027: ETS-2. This ETS will oversee emissions 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 ETS2.
