EU carbon market must lead to faster emissions cuts to tackle climate crisis, new research shows

If the European Union does not significantly strengthen its reformed flagship Emissions Trading System (EU ETS), it risks fuelling planetary heating that will exceed 1.5°C and even missing its own inadequate targets, two simulations show. The EU ETS must significantly raise its 2030 targets, lower its emissions faster than planned, and remove surplus allowances from the market.

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Image: Laura Vinck, Unsplash

With just seven years left on the Climate Clock, the ongoing revision of the European Union’s climate policy framework offers an eleventh-hour opportunity for the EU to do its part as one of the world’s major emitters and go beyond the net 55% emissions reduction target for 2030 set out in its ‘Fit for 55’ package.

Research commissioned in the context of Life ETX, an advocacy project led by Carbon Market Watch, reveals that the European Union’s Emissions Trading System is currently falling short of the bloc’s climate obligations to keep global warming within the limits set by the Paris Agreement. 

Unfortunately and shockingly, the reforms currently on the table will fail even to meet the EU’s inadequate 2030 targets, of reducing emissions covered by the EU ETS by 61%. This is the conclusion of a modelling analysis released today, 10 May 2022, which was carried out by the Öko Institute on our behalf,  and which confirms the findings of an earlier simulation from Climact. This is due to the overestimation of the demand for allowances needed for risk management, such as energy sector hedging and long-term banking on the part of industry. Without stronger reform, the resulting oversupply on the EU carbon market would be so large that it would make it impossible for the ETS to reach its 2030 target.

“This is a make or break moment for the Emission Trading System,” said Carbon Market Watch’s Executive Director Sabine Frank. “EU policymakers have it within their power to ensure that Europe shoulders its fair share of global climate action and applies the polluters pay principle, or they can renege on this responsibility and use the carbon market as a smokescreen for inaction.”

Follow the science

If humanity’s rapidly shrinking carbon budget were divided equally on a per-capita basis, the EU would have to reduce its emissions by at least 65% by 2030. With the current 55% target, the EU will consume double its per capita share of the remaining global budget, according to a new paper by Wendel Trio, a climate change policy and science analyst, also released today.  

In our analysis, this means, that the EU must shrink its greenhouse gas emissions by at least 65% by 2030 (compared to 1990 levels), i.e. Fit for 55 needs to become Fit for 65. In addition, the EU must aim for climate neutrality by 2040 (instead of the 2050 goal of the European Green Deal). This requires a reduction of at least 70% in the EU ETS sectors by 2030.

No rocket science required

To achieve this greater ambition, Carbon Market Watch recommends a three-stage rocket approach for the EU ETS. 

  1. The one-off reduction in the maximum emissions allowed by the EU ETS, known as the cap, needs to be reduced more dramatically, from the currently proposed drop of 117 million tonnes to at least 350 million tonnes
  2. The speed at which the cap is reduced needs to be accelerated. Towards that end, the annual reduction of the available number of pollution permits traded on the system (known as the Linear Reduction Factor) needs to be raised to 4.4%, instead of the 4.2% proposed by the European Commission.
  3. The thresholds of the Market Stability Reserve, which stores surplus emissions allowances temporarily to help maintain price stability, must be revised downwards and reach zero by 2030.

Please note that jettisoning any stage will cause the rocket to crash and the ETS will not be able to meet its target, as this and other modelling exercises clearly demonstrate.

Launch and MEP panel

The Öko Institute study and the paper by Wendel Trio will be presented during a special event on Tuesday 10 May, 14:00-16:00 CET. The event will also involve a panel debate between MEPs and climate policy and civil society experts. For more information and to register, see: https://carbonmarketwatch.org/events/eu-ets-review-a-make-or-break-decision-for-the-climate/

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