EPYD – Emissions Trading System

Article by GCE Clean Mobility Working Group

Generation climate Europe is pleased to host the European Parliament Youth Dialogue – the first event in a series of discussions between young people and Members of the European Parliament.

During this session, we will talk about the revision of the EU Emissions Trading System (ETS). The ETS was the first large greenhouse gas (GHG) emission trading scheme, which covers about 45% of EU greenhouse gas emissions across Europe. It is one of the main tools the EU has to meet its emissions reductions targets. The ETS does so by setting a cap on how much GHG can be emitted each year. Polluting companies buy permits for every tonne of CO₂. So basically companies have to pay for every kilogram of CO2 pollution (the ‘permit’) they release into the atmosphere whilst there is a maximum limit (the ‘cap’) for all companies. Some permits are issued for free by Member States (’free allowances’), while the rest must be bought through an annual allocation system. The annual allocation system is based on the companies’ CO₂ emissions from the previous year. CO₂ emission allowances are capped by the European Commission via the permits available on the market. Up to this day, the ETS covers more than 11,000 power stations and industrial plants in 31 countries and intra EU flights.

Going more in-depth, the ETS covers several types of emissions, meaning CO₂ emissions, NOx as well as PFCs. However, up until now, the EU ETS system has not lead to an actual CO2 emissions reduction: the system as a whole provided too many permits, thus not providing enough incentives for companies to decrease their CO₂ emissions. 

Moreover, the ETS does not apply to sectors such as aviation outside of the European Economic Area. The European Commission had postponed to include extra-EU flights into its scheme due to pressure from the international aviation industry who lobbied the EU to wait for the new scheme by the ICAO (International Commercial Aviation Organization), which is called CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation). However, this program is still under review by the European Commission. Its efficiency is seriously questioned because additional carbon cost is transferred to the passengers, leading to slightly higher ticket fares, a unit CO₂ price of less than 1€ is added to the ticket price.  

Another industry which escaped regulation for decades now is shipping. This means that the shipping sector has paid not a single Euro for its pollution. Contrastingly, shipping makes up 13% of EU emissions and its emissions are likely to increase by up to 50% by 2050 if no actions are taken. Even though the European Parliament approved the inclusion of shipping into the ETS by 2023, the industry has several concerns regarding the implementation and the risks it could present. In particular, these concerns relate to the feasibility for companies to maintain their competitiveness including less diversified goods but also to the limited infrastructure available to shift their energy model from fuel-based to carbon-neutral. More so, in the various international schemes and norms, the inclusion of shipping has been proven difficult. 

This is exactly why the revision of the ETS is tremendously important: while every other sector’s climate emissions have decreased since 1990, transport emissions have increased by almost 30% and aviation emissions have more than doubled risking to hamper or damage the EU’s climate ambitions.

The Commission is expected to release the proposal for the revision of the ETS in June, including an expansion of the ETS to shipping and a reform of the scheme for aviation emissions. The next step will be for the Parliament to negotiate with the Council of the European Union, amending the proposal as needed and then having a vote, as is described in the Treaty of the Functioning of the EU (art. 294).