The EU Emissions Trading System is the flagship of the EU policy, aiming to tackle climate change and its key mechanism to diminish greenhouse gas emissions in a cost-effective way while ensuring its sustainability. The main objective of this informative article is to present a timeline of the EU ETS and its most essential characteristics.
Some history
To begin with some history, EU ETS was first mentioned in 1997, which set for the first time legally-binding emissions reduction targets, the Kyoto Protocol, or caps, for thirty-seven (37) industrialized countries and then at EU’s Green Paper, back in 2000. It is the world’s biggest trading allowance system which was adopted in 2003 and launched in 2005. But, how does it work? EU ETS gives the beneficiary the “right” to emit and – consequently – to pollute, it works on a “cap and trade” basis. In order to be able to produce you had to buy as many allowances as you needed to.
So far, four main phases have taken place. A three-year pilot period (2005-2007), when the EU was “learning by doing”, covered just the CO2 emissions from power generators and energy-intensive industries. Businesses took almost all allowances for free, but it successfully established a price for carbon and free trade in emission allowances across the EU.
The four phases of EU ETS
However, due to the economic crisis, the price of the allowances collapsed generating an enormous surplus. During the second phase (2008-2012), which coincided with the first commitment period of the Kyoto Protocol, the percentage of free allowances was reduced to 90%. Each member should develop a National Allocation Plan (NAP), which would demonstrate the issued allowances and their distribution which had to be approved by the European Commission (EC). Also, the cap of allowances shrunk by 6,5% compared with the previous phase. The aviation sector was a part of the EU ETS by 1st January 2012.
In addition, phase three (2013-2020) brought considerable changes compared to the two previous ones. The primary modifications included a single, EU-wide cap on emissions in lieu of the previous system of national caps, auctioning as the default method for allocating allowances (instead of free allocation), and more industries, including gas. A major reform that took place in the third phase after the negative impacts of the Economic Crisis and surplus of allowances was the Market Stability Reserve. It was a mechanism that would reinforce the resilience of the system against shocks such as the Economic Crisis.
Current events
On 14th July 2021, the EC adopted a series of legislative proposals including the EU ETS Directive covering the following decade. Currently, we are in the fourth phase (2021-2030) of the ETS EU in which we might observe major reforms taking place. Firstly, the number of emissions declined by 2,2 % compared to 1,74%, to meet the target of the coming decades under the fit for 55% package. Secondly, conforming to the “no man no region left behind” policy and the principle of solidarity there are two new funds: “the innovation fund” and “the modernization fund”. will aid ten Member States in need with the facilitation of innovative investments and the modernizing of their infrastructure.
To conclude, reflecting back on the Industrial Revolution we may observe that economic growth used to go hand in hand with the emissions of the intensive industries. The implementation of the ETS mechanism shows that it is possible to decouple emissions from economic growth. In this way, it encourages low-carbon investments, incentivizes the deployment of low-carbon and environmentally friendly technologies, and manages to deliver a cost-effective lessening of carbons, maintaining the sustainability of the economy.
Written by our Energy Analyst
Katerina Filakouri
Katerina has a Bachelor in Law from the National and Kapodistrian University of Athens and just completed her traineeship at a boutique law firm in Kolonaki, Athens. She is a postgraduate student of the MSc in Energy: Strategy, Law, and Economics at the University of Piraeus in the faculty of International and European Studies. Katerina would like to be a legal and policy advisor regarding energy transition and climate change. She speaks Greek, English, French, and Russian. She is keen on English literature and indie films.
