By / September 21, 2015

EU Emissions Trading System: cost-effective emission reductions and low-carbon investments: Initial Appraisal of a European Commission Impact Assessment

Written by Samuele Dossi This note provides an initial analysis of the strengths and weaknesses of the European Commission’s Impact…

© patila / Fotolia
Written by Samuele Dossi

This note provides an initial analysis of the strengths and weaknesses of the European Commission’s Impact Assessment (IA) accompanying the above proposal which was adopted on 15 July 2015 and has been referred to the Committee on Environment, Public Health and Food Safety.

EU Emissions Trading System: cost-effective emission reductions and low-carbon investments
© patila / Fotolia

The EU Emissions Trading System (EU ETS) is the largest international trading system for greenhouse gas emission allowance. The ETS Directive was adopted in 2003 (and revised in 2009); it took effect in 2005 and now covers all EU Member States plus Iceland, Lichtenstein and Norway. The aim is to cut greenhouse gas emissions by 80 to 95 per cent compared to 1990 by 20501. The ETS works by putting a limit on the overall emissions from sectors included in the scheme and, ideally, these are reduced every year. Within the limits, companies can buy and sell emission allowances when needed (i.e. cap and trade approach). While until 2012 most allowances were given out for free by using the “grandfathering” approach – based on historical Greenhouse Gas Emissions (GHG) -, since 2013, the system has operated through a benchmarking approach based on performance. A detailed overview of the mechanisms governing the ETS and its operation to date can be found in the EPRS Implementation Appraisal “Climate action. Greenhouse Gas Emissions and the EU Emission Tradig System, published in September 2015.

The current proposal forms part of the Commission’s 2015 Summer Energy Package and is for a structural reform of the EU ETS. It complements a parallel proposal, on the Market Stability Reserve (MRS), adopted by the Commission in January 2014. The European Parliament adopted its first reading position on that proposal on 8 July 2015, on the basis of an agreement reached following negotiations with Council. The MRS is mainly intended to trigger adjustments to the annual auction volumes in situations where the total number of allowances in circulation is outside a certain predefined range. In its Resolution of 14 March 2013 on the Energy Roadmap 2050 the European Parliament recognised that the ETS is the principal instrument for reducing industrial greenhouse gas emissions and promoting investment in safe and sustainable low-carbon technologies. In its Resolution of 5 February 2014 on a 2030 framework for climate and energy policies, it supported the establishment of a new binding CO2 reduction target, based on a revised and well-functioning ETS.

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