The EU ETS to 2030 and beyond: adjusting the cap in light of the 1.5°C target and current energy policies

Abstract

The Paris Agreement calls on countries to pursue efforts to limit global average temperature rise to 1.5°C. We derive a 2016-2050 emission budget for the EU Emissions Trading System (EU ETS) based on cost-effectiveness criteria aimed at achieving the 1.5°C target with a 50%-66% probability, and translate it into a cap reduction path. We show that, under current ETS parameters, the vast majority of this budget will be consumed by 2030. Meeting the budget under current 2030 EU ETS parameters would require drasticand probably unrealisticadditional efforts after 2030. We derive a cost-effective scenario delivering a smoother and more credible emission pathway. We show that recently increased EU targets for renewable energy and energy efficiency, along with national coal phase-out policies up to 2030 provide cap adjustment potential. If the cap is adjusted to reflect these policies and if phased-out coal capacities are fully substituted through renewable energy, emissions in ETS sectors could decline by 57% through to 2030. This approximates our cost-effective scenario and translates into a linear reduction factor (LRF) for the cap of 3.6% for the period 2021-2030. Key policy insights:. Paris Agreement-compatible emission budgets can serve as a guideline to define the minimum requirement for emission reductions in the EU ETS. . The globally cost-effective emissions budget for EU ETS sectors in line with limiting global warming to 1.5°C is about 30 Gt CO 2 e for 2016-2050. . During the next decade the annual emissions cap must decrease much faster than currently planned to meet the cost-effective budget. . Achieving a globally cost-effective emissions path requires that the linear reduction factor (LRF) of the EU ETS cap for 2021-2030 is raised from currently 2.2% to at least 4%. . Incorporating EU targets for renewable energy and energy efficiency, as well as national coal phase-outs, enables an increase of the LRF for 2021-2030 to 3.6% without an additional abatement burden on EU ETS installations.

Allocation, allocation, allocation! The political economy of the development of the European Union Emissions Trading System

“…The Phase 4 reforms had taken several important incremental steps, but more ambitious reforms would be required to reach these new targets. Several significant changes were now being considered, including: extending the EU ETS to cover the maritime, road transport, and buildings sectors; overhauling the carbon leakage regime, including the proposal for a Carbon Border Adjustment Mechanism (CBAM); and making a major adjustment to the emissions cap through a one‐off downward adjustment (“re‐basing”) or by further increasing the linear reduction factor (Zaklan et al, 2021). …”

“…• overhauling the carbon leakage regime, including the proposal for a Carbon Border Adjustment Mechanism (CBAM); • and making a major adjustment to the emissions cap through a one-off downward adjustment ("re-basing") or by further increasing the linear reduction factor (Zaklan et al, 2021).…”

A VaR-Based Methodology for Assessing Carbon Price Risk across European Union Economic Sectors

“…An interesting point was made by [27], who observed that significant differences between the EU Member States can be identified in terms of ETS implementation, but their research covered only the first phase of the system. A recent scholarly contribution has also demonstrated that a cap adjustment can take place because of increased EU targets for renewable energy and increased energy efficiency, accompanied by policies aimed at eliminating coal from the energy mix at the national level; hence, it was estimated that emissions in the sectors covered by the EU ETS can diminish by 57% until 2030 [28].…”

Emissions trading system: bridging the gap between environmental targets and fair competition

“…It is a cap-andtrade approach in which the cap decreases over time [5] and installation owners can trade allowances following market-based opportunity decisions [6]. With the Green Deal, the European Commission intends to achieve climate neutrality by 2050 [7] boosted by the Fit-for-55 package [8]: a set of proposals to pave the way for decarbonization goals [9]. The package includes major initiatives on effort-sharing regulation [10], land use, forestry, alternative fuel infrastructure, measures aimed at reducing carbon leakage, and ETS.…”

“…The absence of a global carbon market can result in carbon leakage, especially if carbon prices are destined to increase to achieve new climate targets [32]; from this perspective, it is worth noting that the carbon price has often been used as an indicator of the effectiveness of the ETS [33]. Some scholars have underlined that the new 2050 targets can be achieved if the ETS parameters are properly updated [8].…”