The EU emissions trading system, also known as EU ETS, is a cap and trade setup of emission allowances for the power generation sector and energy-intensive industry. As a tool in the tool box of emission reductions, think of it as the EU’s biggest hammer, covering about 40 % of the EU’s total CO2 emissions. And the hammer is about to get bigger.
What are the latest changes?
The EU Council and Parliament have now reached a provisional agreement (meaning pending formal adoption in both institutions) to tighten the reins. There are many details in the package, but some of the headlines include:
- Overall ambition to reduce emissions by 62 % in the sectors covered by the EU ETS by 2030 with 2005 as base year, through two mechanisms: 1) annual reduction of allowances of 4,3 % in 2024-2027 and 4,4 % in 2028-2030 and 2) one-off reductions in total allowances of 90 million tons in 2024 and 27 million tons in 2026.
- Free allowances will be phased out fully by 2034.
- Introduction of the Carbon Border Adjustment Mechanism, aiming to prevent carbon leakage. This will be phased in at the same speed as free allowances are being phased out. In other words, starting 2026 and fully phased in by 2034.
- Inclusion of new sectors such as shipping, buildings, transport and possibly municipal waste incineration.
- More money for financing the green transition through various funds.
Great! But, what does it mean?
Admittedly, this is all a bit geeky. But, in short, the polluter pays principle just got more serious. Going forwards, the reduction of allowances means that it’ll be increasingly costly to emit CO2. And that’s a good thing because companies will be able to strengthen their business cases for emission mitigations. It’s a great foundation to build projects around energy efficiency, phasing in renewable energy, fuel switching including hydrogen as well as carbon capture.
Who’s going to have to move on this?
Well, everybody in the EU ETS, really. Using CaptureMap, our tool for mapping all the large CO2 emitters globally, we’ve identified all those sites that as of 2021 have more than a 100 000 ton gap between their free allowances of CO2 and what they actually emit each year. In total we find 612 facilities, 770 million tons of annual CO2 emissions, and a total gap of 527 million tons between what they emit and their free allowances.
So what? Is ETS worth anything?
Oh yes. As a first ball park, let’s use the most recent EU ETS carbon prices. Ember has a nice dashboard of the EU ETS Futures Prices, shown in the illustration on the right. On December 19th, 2022 it traded at 84 Euro/ton.
Let’s multiply these two together. 527 million ton gap at 84 Euro/ton gives about 44 billion Euro – every year. Now, if that’s not a decarbonization opportunity for you, I don’t know what is.
We’ve written some articles on Ammonia, Cement and Waste-to-Energy that indicate good potentials for carbon capture going forward. These are just some of the so-called hard-to-abate sectors that don’t easily cut their emissions.