Emissions from shipping, buildings and transport are to be drawn into the EU Emissions Trading Scheme as a result of Europe’s new net zero target. In the future the EU-ETS could also link up with the new Chinese ETS and the many other similar schemes around the world. Meanwhile, post-Brexit UK is charting its own ETS path that’s even more ambitious.
Earlier this month EU carbon permits hit their highest price since the market launched in 2005 – €34.25 (AU$54) a tonne of CO2. Prices have decreased slightly since but remain around €33 (AU$52) a tonne, and the upward climb is only set to increase, as measures kick in to back up the bloc’s new target for emissions reductions. The target for 2030 has risen from 40 per cent to 55 per cent from 1990 levels, and Europe aims to reach net zero emissions by 2050.
To achieve these aims, in June Brussels will publish proposals to restrict emissions across all sectors. Among these will be a revamp of the EU Emissions Trading Scheme is planned, which will tighten the cap on the number of permits in the market. Analysts at Refinitiv expect this to drive up prices to about €89 (AU$140) per tonne of CO2 by 2030.
Expert opinion from the Zero Emissions Platform is that the proposals to revamp the scheme should put the EU on a cost-efficient pathway towards net-zero by 2050.
Industries at high risk of carbon leakage due to competition from more polluting firms in the rest of the world would continue to receive support but the EU is also examining the feasibility of a carbon border adjustment targeting specific industrial sectors to protect domestic industry and imports.
How does the ETS work?
The EU ETS was the world’s first major carbon market and remains the biggest one. It works on the cap and trade principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by installations covered by the system and this cap is reduced over time so that total emissions fall.
As the EC’s website explains, “within the cap, companies receive or buy emission allowances, which they can trade with one another as needed. They can also buy limited amounts of international credits from emission-saving projects around the world. The limit on the total number of allowances available ensures that they have a value.”
It operates in all EU countries plus Iceland, Liechtenstein and Norway and is intended to limit emissions from heavy energy-using installations.
Emissions from those installations covered by the ETS have declined by about 35 per cent between 2005 and 2019.
The EU now aims to link the EU ETS with other compatible systems. There are ETS systems in place in many parts of the world now: Canada, China, EU, Japan, Kazakhstan, Korea, Mexico, New Zealand, Colombia, Montenegro, Ukraine, Brazil, Chile, Indonesia, Japan, Pakistan, Philippines, Switzerland, Taiwan, Thailand, Turkey, United Kingdom, parts of the USA and Vietnam.
Shipping to be included
In September 2020, the European Parliament voted in favour of bringing shipping into the ETS, ending fuel tax exemptions and regulating pollution from ships in ports. It’s now consulting on the way forward.
Clara de la Torre, deputy director-general of the EC’s Directorate General for Climate Action, has said the proposals will boost the demand for sustainable alternative fuels and raise revenues to finance climate action.
Shipping owners are objecting, just as airline operators resisted climate-related regulation for years. They want an international solution. In a recent online discussion on the proposals Alfred Hartmann, whose Hartmann Group owns or operates almost 120 ships, said that aviation’s inclusion in ETS has not led to emissions reductions – but this is untrue.
According to Climate Action, the amount of fuel burned per passenger dropped by 24 per cent between 2005 and 2017. The fact that emissions from airlines have increased is because of an increase in passenger numbers.
Philippos Philis, chairman and CEO of the manager and operator Lemissoler Navigation also criticised the move to include shipping in the EU ETS, threatening nothing less than the end of the world as we know it: “Such a measure will contribute towards destruction of worldwide trades and possibly create the fundamentals for political tension with non-EU countries,” he thundered in his remarks to the discussion.
He called instead for a global carbon pricing system. This would have global political acceptance; it would be credible and it would keep shipping viable, he said, describing those benefits as essential “pillars” of any such scheme. Europe’s ETS offers none of them, he said. “Decarbonisation of the shipping industry is a global challenge … and should be regulated at that level.”
Ship owners in this seminar particularly warned that European trade with China would suffer if shipping is included in the ETS, because, they said, China doesn’t have an ETS and would resist the extra costs.
They were clearly unaware that China is launching its own emissions trading scheme from next month, in line with its new target to peak emissions before 2030 and become carbon neutral 30 years later, which is ultimately likely to link up with the European one.
The shipping magnates are facing a carbon-driven headwind.
The Chinese ETS
The Chinese scheme will, when complete, cover about a third of China’s national emissions, and will soon outstrip Europe’s to become the largest in the world.
A former governor of the People’s Bank of China, Zhou Xiaochuan, has even expressed interest in linking it with EU ETS following the model of Shanghai-HK Stock Connect. This allows investors in both cities to trade financial products in each other’s market.
Zhou also called for the establishment of a special bilateral fund between China and Europe to collect carbon emission charges on flights and shipping. The revenue gained, he said, would support the development of new zero emission transportation or other ways of reducing emissions.
The Guangdong state pilot ETS scheme has already formed a strategic partnership with EU ETS for mutual membership recognition and development of trading products for investors in both schemes.
Buildings and transport emissions
Europe’s new net zero goal also means emissions from heating buildings and transport must fall into the EU ETS, which would nearly double its coverage to around 80 per cent of greenhouse gas emissions in the EU.
Policymakers have been advised by think-tank CERRE (Centre on Regulation in Europe) to protect the most vulnerable consumers, since they would face higher transport and heating costs.
Including emissions from heating buildings and transport “would be a substantial contribution to the achievement Europe’s climate goals”, CERRE says in a report co-authored by Professor Michael Pollitt of Cambridge Judge Business School.
The UK-ETS
The UK has set up its own domestic trading scheme since Brexit. The British government has said the scheme will be “more ambitious than the EU system it replaces – from day one the cap on emissions allowed within the system will be reduced by 5 per cent, and we will consult in due course on how to align with net zero.”
There are around 1000 installations in the UK which participate in the EU ETS, including power stations, oil refineries, offshore platforms, industries that produce iron and steel, cement and lime, paper, glass, ceramics, chemicals and about 150 UK-administered aircraft operators.
Operators who are considered at risk of carbon leakage receive allowances through free allocation (if eligible) from their member state of predetermined amounts agreed by the EU Commission. Other operators buy allowances on the carbon market or via a government administered auction.
Some UK-based operators falling within the scope of the EU Emissions Trading System Directive are excluded from the scheme through their inclusion in the UK Small-Emitter and Hospital Opt-Out Scheme.
Instead of receiving and needing to give up allowances these operators are given emissions targets, and these excluded installations pay only for emissions which exceed their target.
The British scheme is expected to diverge from the European one, since currently UK ambitions are greater than Europe’s. How they will then interlink remains to be seen.
A global trade on carbon permits can’t now be far off. Many observers believe only a global price on carbon affecting all countries will finally make fossil fuels too expensive to take out of the ground. Russia and the Arab states…are you listening?
David Thorpe is the author of Energy Management in Industry and ‘‘One Planet’ Cities: Sustaining Humanity within Planetary Limits and Director of the One Planet Centre Community Interest Company in the UK.
David Thorpe is the author of Energy Management in Industry and ‘‘One Planet’ Cities: Sustaining Humanity within Planetary Limits and Director of the One Planet Centre Community Interest Company in the UK.