EU ETS Market trends
The EU Emissions Trading System (EU-ETS) has been instrumental in promoting carbon pricing within the European Union. This cap-and-trade system allows for the trading of emissions allowances to ensure that the total emissions remain within the prescribed cap. This trading approach helps to combat climate change in a cost-effective and economically efficient manner. The system has undergone several changes since its inception in 2005, and each phase has provided valuable learnings.
One of the most important lessons from EU-ETS is that a cap-and-trade system can ensure credible and binding emissions reductions. The gradual yearly reduction of allowances is a key element in delivering its promised contribution to long-run deep decarbonization within EU ETS. This is a significant advantage over other policy instruments like carbon taxes.
The economic and sovereign debt crisis in Europe had a significant impact on EU-ETS. Emissions dropped due to reduced production of cement, smelting of ore, refining of oil, and power generation. This led to a drastic reduction in demand for emission allowances. However, supply remained unchanged as auctioned volumes were set in advance and companies received their predetermined free allocations regardless of production. To address this issue, several steps were taken, including backloading of auctions, increasing emission reduction targets, retiring of allowances, expanding the scope, limiting international imports, and introducing a strategic reserve for price management.
The price range of allowances under EU-ETS has been fluctuating over the years. In Phase-1, the price was in the range of 25-30 euros per allowance, but oversupply led to a fall in prices. In Phase-2, banking was allowed, which stabilized prices in the 20-25-euro range. However, the economic recession impacted demand. In Phase-3, there was an oversupply of allowances in the market, leading to a decline in prices. However, in the last three years, the price has been on the rise and has reached 54 euros due to the stringent allowance reductions planned for the 2021-2030 period.
EU ETS has been an important cross-cutting tool for pricing carbon from the use of fossil fuels within the EU. Its carbon price “base” covers most emissions within the electricity sector and energy-intensive industry. The system has been instrumental in promoting a low-carbon economy in Europe and has helped the EU meet its emissions reduction targets.
In conclusion, EU-ETS is a vital tool in the fight against climate change. The system’s learnings over the years have been invaluable in refining and improving the system to make it more effective. As the world transitions to a low-carbon economy, the EU-ETS will continue to play a crucial role in promoting carbon pricing and reducing emissions.