EU Climate Policy: An Updated Carbon Market

Power plant in Poland

Image: Zenon Korzeb, CC BY-SA 2.0

By Ashira Morris, ODP Staff Writer

Taken together, the European Union’s 27 countries are the #4 carbon emitter globally. The recently released “Fit for 55” package spells out how, exactly, the bloc will go from its current output to hitting its goal of climate neutrality by 2050. One of the biggest proposed changes is an update to the EU Emissions Trading System, or ETS. The carbon market currently covers airlines and industrial sites responsible for nearly half of the bloc’s emissions. The new proposal says:

  1. Widen the market to include shipping, buildings and road transport.
  2. Update the market’s mechanisms to hit the EU’s new target of a 55% reduction in emissions by 2030 (the package’s namesake)

Why This Matters: Since the market was introduced in 2005, the ETS has been making the economic case for putting less carbon into the atmosphere. Simply put: you pollute, you pay.

For years, the cost of carbon per ton was pretty low, but recent changes in policy and legislation have driven the cost up to more than €50 per ton of emitted carbon. By broadening the scope and continuing to lower the maximum carbon allowed, the updated market will continue to increase the cost—and financially incentivize companies and governments away from carbon pollution.

How New Regulations Would Increase Cost: The EU’s ETS is the world’s first carbon market and remains the biggest. It’s a cap and trade system, meaning that a total amount emissions is set for the whole system (the cap), which gets lower over time. In order to operate, the EU’s airlines and 11,000+ power plants and industrial installations need to purchase emissions permits whose total cost is determined by how much carbon is emitted. They can then trade those permits as needed.

Under the current system, about half of these permits are given away for free. The new package tightens this twice over by limiting the total number of permits available and reducing how many are available for free. Under the proposed plan, the cost of carbon per ton would jump from its current  €50 per ton to €90 by the end of the decade, according to  Sebastien Rilling, an analyst for EU power and carbon markets at information provider ICIS.

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