Published on 25 June 2018

CSR

The carbon market will not allow Europe to reach long-term climate goals

Will the barely reformed European carbon market soon have to reinvent itself? Whatever the case, European institutions will have to think about next steps very quickly because if reform is more ambitious than expected, it will not necessarily be sufficient enough to turn the carbon market into a major lever for long-term climate objectives.

In 2017, greenhouse gas emissions decreased by 26% in sectors covered by the carbon market.
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According to the latest roadmap drawn by the European Commission in 2011, the Union will have to reduce its greenhouse gas emissions by 80 to 95% (compared to 1990 levels) by 2050. The European carbon market (EU ETS) was the instrument put in place to spearhead this objective in 2005.

The carbon market, an insufficient tool

This tool is likely to be insufficient in decarbonising the economy, despite reform recently adopted and intended to remedy its dysfunctions. Or so conclude the results of the second edition of "2018 State of the EU ETS", conducted by I4CE, Ecoact, Nomisma Energia, Wegener Center at the University of Graz, International Centre for Trade and Sustainable Development (ICTSD) and the European Roundtable on Climate and Sustainable Transition (ERCST).

To date, the 2020 emission reduction target for industry players covered by the carbon market (energy and highly emitting industrial companies, i.e. more than 10,000 facilities) has already been reached since 2016. In 2017, emissions already decreased by 26% compared to 2005. And the authors of the report remain optimistic for the 2030 targets (a 40% reduction), even though emissions have started to go up for the first time in 2017. It is "difficult to know if this is the beginning of a trend”, says Jean-Yves Caneill, senior advisor to ERCST.

But several signals send warning signs of a darker future. According to the study, if emissions reductions have already reached such a level, it is not necessarily thanks to the allowance market. Other factors, such as European or national regulations, particularly those concerning coal, or the introduction of carbon pricing at the national level, such as the UK carbon floor price, are more likely responsible for the decrease.

Heightened climate objectives for the EU

In the case of electricity producers, it is the development of renewable energy that is identified as the main factor in reductions according to the report, namely -23%, or 300 MtCO2. The impact of these new energy sources is much greater than that of the carbon market.

In addition, measures taken for the next phase of the carbon market (2021-2030) may be insufficient. The annual emission reduction factor has indeed been set at 2.2%, which, according to the study's calculations, leads to an 85% reduction in emissions in sectors covered by the carbon market by 2050 (compared to 2005). This is below the 90% reduction objective detailed in the 2011 roadmap.

"The gap may seem anecdotal, but it has a significant impact on the allowance price," says Caneill. It is still low, around €15 per tonne, when the authors of the study estimated that a price "well above €40 per tonne of CO² was needed" to achieve these long-term goals.

This should be reviewed soon as they are probably on the rise. The EU's new strategy for a long-term reduction of EU greenhouse gas emissions is expected by the end of this year.

Béatrice Héraud @beatriceheraud


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