EU ETS: Is the strongest UE GHG protocol the best?
Since 2005, the EU has had in place “The EU emissions trading system”. It is a carbon market and one of the regulatory tools to achieve all or part of the politically determined GHG reduction targets.
This system aims to reduce the emissions of large European industrial installations, the most energy-intensive. Today about 12,000 installations are concerned across Europe, in many sectors: electricity and heat, refineries, steel and metals, cement, petrochemicals, etc. The scheme is designed to reduce emissions from the largest and most energy-intensive industrial installations in Europe.
The “covered installations” obtain a certain number of allowances from the public authority. Over a given period, called the “compliance period”, the installation must surrender as many allowances as it actually emitted over the same period.
On this market, allowances can be bought or sold. Installations whose emissions exceed their number of allowances must obtain allowances, at a price, before the end of the period. The aim is that in the following period, the installation will remove pools of emissions whose removal/replacement cost is lower than the price of allowances. In this way, the installation avoids being over-quotaged or can sell allowances if it is over-quotaged.
The ETS or EU ETS is the largest GHG emissions trading scheme in the world. These installations covered 45% of EU GHG emissions (Directive 2003-87-EC following the Kyoto Protocol).
In the same way as the Protocol, the EU ETS is organised in periods or “phases”. Today we are in the 3rd phase (beginning of the 1st in 2005) from 2013 to 2020. Soon in the 4th, lasting 10 years (2021-2030). Between each phase, the scope of the emissions measures is widening: the number of GHGs taken into account in the quotas has increased (CO2 then CO2 and N2O), the number of sectors involved, the countries that join, etc. On the other hand, the emission ceiling per installation is decreasing (by 15% between the 1st and 3rd), which means that they have to be reduced. In May 2020, articles multiplies about the historical market performance, with a diminution of 8,7% in 2019.
Why should this system be the most powerful? Because it is the one that has modelled the economic constraint in the service of sustainable development, on a European scale, on powerful economic players: industrial groups, which are, moreover, highly polluting. Why should it not be the best? Because, like any market, it has its faults, and even with State regulation of this market (cf. Keynes’ theory) some faults remain. The main one is the confusion between emission and compensation.
Indeed, what happens when an installation exceeds its available emission quantity and buys allowances for its balance? If ever the average emissions of all the players exceed those authorized by the States, the EU ETS has no choice but to “emit” additional allowances on the market. The purchase of these additional allowances can be expressed in two ways:
- Either it is a financial penalty, because the high allowance price penalises the installation for its lack of effort,
- or, at the other end of the spectrum, the purchase can finance a project that reduces GHG emissions by the same amount,
- or both.
However, the price of the allowances issued is relatively low (5 to 7 euros in 2019). It did not present a sanction in the sense that it was cheaper to buy additional allowances, even if they were not market-based but EU-issued, than to invest in emission reductions. Does the purchase therefore reduce GHG emissions by the same amount? No. If the price is lower than the investment needed to reduce GHG emissions in one company, it is not enough to compensate in another project. Moreover, “anthropogenic sinks”, the only way to “offset” our emissions, are potentially far too small to cover our emissions.
The carbon market has proven its worth since its existence, but it is based on a fragile logic: it presents the issue of GHG emissions as that of a balance on communicating basins, whereas the objective is not to reach a balance but to reduce our emissions.