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The European Union Emission Trading System and Carbon Border Adjustment Mechanism

Will an integrated carbon market cut carbon emissions?

by: Elena-Sofia V. Cesario

At the COP26 Climate Change Conference in Glasgow, the European Union has been one of the most influential actors lobbying to obtain climate neutrality by 2050 and lower greenhouse gas emissions by 25% by 2030.

“The foundation of any programme to decarbonise the economy is to put a price on carbon”, Vice President of the European Commission Frans Timmermans said. “The most powerful and effective weapon to drive down emissions in Europe is our ETS”, he added.

ETS stands for the EU’s ‘Emission Trading System’.

This was a direct result of the Kyoto Protocol’s mechanism at a regional level. It was transposed by the EU with the Directive 2003/87/EC to reduce greenhouse gas emissions, with the further intent of integrating the European energy market. Consequently, it had put a price on carbon.

Due to the 2008 global financial crisis, however, the ETS did not provide the expected results. It was seen as an ineffective instrument, given not only the low prices delivered but also the lack of investments in low carbon technologies following its launch. This compelled countries such as Canada, China, Japan, and Switzerland to operate or develop their own systems in recent years.

The EU’s current policy direction, therefore, is to strengthen the ETS and extend it to other sectors, given its efficacy in cutting emissions. This would happen alongside the development of the Carbon Border Adjustment Mechanism (CBAM) proposed earlier, which consists of “an import charge on EU imports of electricity, cement, aluminium, fertiliser, iron, and steel goods”. It considers the emission content of production, as well as the difference between the EU-ETS price and any carbon price paid in the production country.

EU flags in front of the European Commission building

Photo courtesy of Guillaume Périgois via Unsplash

If a country puts a price on carbon, which is what most nations are doing to pursue the decarbonisation of the economy, then there is a risk of carbon leakage. CBAM will prevent this. In line with WTO standards, a trial period of 2 years is required to see the effects of 5 sectors: cement, fertiliser, steel, aluminium, and electricity. To the table was brought the first effect of the C-BAM: the case of Turkey, which opted to adhere to the Paris Agreement; otherwise, with the C-BAM in force, it would have negatively damaged trade with the EU.

Brussels aims to make road transport, aviation, and the maritime industry more sustainable

As detailed in the European Union’s agenda, a new emissions trading system for road transport will also be applied to pursue the final goal of reducing emissions. Moreover, it has been reported that the EU intends to create more energy-efficient buildings as part of this plan. Simultaneously, the challenges of energy transition have also been acknowledged, among others the necessity of avoiding energy poverty as a result.

As opposed to road transport, four months ago, the European Union adopted several actions to minimise greenhouse gas emissions from maritime transport. Nevertheless, currently, the International Maritime Organisation (IMO) has different energy efficiency programmes in place. The organisation’s strategy intends to decrease 50% of its greenhouse gas emissions – based on 2008 levels – by 2050. Furthermore, the UN body does not require the use of low-carbon fuels.

With that, however, they fall short of reaching EU standards.

Thus, the EU feels that the maritime sector could do more and advocates for the IMO’s further development of green practices. One potential solution to help substantially reduce sea trade emissions is green ammonia to power vessels. Another way to achieve this goal is if the EU keeps implementing its ETS system. Putting a price on carbon will make the business case for alternatives more attractive.

As for aviation, it must make a larger contribution to fulfilling climate commitments. Between 2013 and 2018, emissions from the aviation industry climbed by 5% each year. If it were not for the decline in air travel due to the Covid-19 pandemic, aviation emissions would still be rising.

Hence, the EU is pushing for more solid rules when it comes to the aviation industry.

The current project, “Destination 2050: A route to net-zero European aviation”, is insufficient since it leaves it to the European nations’ policymakers to put necessary incentives in place to decarbonise the industry.

Accordingly, now is the time for the marine and aviation industries to act and turn towards green solutions, especially because 2% of the world's carbon emissions are produced from international shipping. Action, as well as the EU ETS and the CBAM, is crucial to meet the 2050 goals.


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