EU carbon market

The European Union’s Emissions Trading System (EU ETS), often referred to as Europe’s flagship tool to fight climate change was established in 2005 and includes over 11.000 installations across the European Economic Area, covering around 40% of Europe’s greenhouse gas (GHG) emissions. The EU ETS is a “cap and trade” system, meaning that a cap determines the total amount of greenhouse gases that companies can emit. Under the annually shrinking cap, companies receive or buy emission allowances which they can trade as needed.

Since the beginning, the EU ETS has suffered from a surplus of emission allowances which has led to a price too low to spur a climate-friendly transformation. The main causes for the insufficient price signal are an unambitious overall target, the economic crisis that started in 2008, and the inflow of international credits.

The situation has improved and prices have recovered since the EU ETS Market Stability Reserve (MSR) began to absorb excess allowances off the market at the beginning of 2019.

But as countries across Europe phase out coal power, an urgent and needed measure in itself, a new surplus could build up on the market that would likely crash the price again. To avoid this, governments should unilaterally cancel allowances as coal power plants are closed down, and the market stability reserve should be strengthened through the legislative reform process set to take place by 2021.

EU national coal phase-out plans


      The EU ETS must be revised by 2023 to bring it in line with staying below 1.5C warming, as agreed in the Paris climate agreement. Carbon Market Watch calls for a steeper emission reduction path and a phase-out of the free allocation of pollution permits to heavy industry that has made over 25 billion euros windfall profits from the EU ETS in the past.

      Number of available EUAs as a result of planned coal phase-out