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Tricky trade-offs: The future of the EU ETS

On September 17, the European Commission released a number of possible design changes of the European Union’s Emissions Trading Scheme (EU ETS) that mirror some of the thinking in AFRY’s September 11 White Paper ‘Tricky Trade-offs’ – and then threw in some more exotic options for good measure.

Just the day before, Ursula von der Leyen, President of the College of Commissioners, gave her State of the European Union speech, calling for an increase in the Union’s ambition level:

I recognise that this increase from 40 to 55 is too much for some, and not enough for others. But our impact assessment clearly shows that our economy and industry can manage this. And they want it too. (…) Our impact assessment clearly shows that meeting this target would put the EU firmly on track for climate neutrality by 2050 and for meeting our Paris Agreement obligations. And if others follow our lead, the world will be able to keep warming below 1.5 degrees Celsius.

However, the documents released the following day confirm that the Commission has been thinking about the expanding the scope of the ETS to other sectors – a major design challenge highlighted in our White Paper. All design options in the Impact Assessment bring the maritime navigation sector into the European-level carbon market, but four out of five also include the buildings and transportation sector. Interestingly, some of those options include a parallel European-level ETS just for these latter two sectors, and also an option to integrate them into the existing European-level ETS while maintaining some responsibility for each individual Member State as well. This heralds the start of a complex debate on the governance of the decarbonisation of these sectors.

The Commission held its guns on two further design challenges our White Paper mentioned as crucial to the future of the EU ETS.  On the issue of carbon border adjustments, it promised to deliver a further Impact Assessment during the course of 2021. Likewise, it promised that it would explore the functioning of the ETS’s Market Stability Reserve during a review that was anyway mandated for 2021.

As we highlight in the four strawmen presented in our White Paper, the real impact to the European carbon price will arise not from an summation of the individual impacts brought by these three design challenges, but by the interactions among them. We encourage stakeholders in the energy sector to reach out to our experts Gareth Davies and Alex Luta to explore how different design options would affect them in the future.

Alex Luta

Gareth Davies