How emissions trading went from write-off to cornerstone of EU climate policy

The EU Emissions Trading System (EU ETS) is a cornerstone of the EU's efforts to reduce greenhouse gas emissions. But the system has faced challenges: emission trading has at times been heavily criticized and almost abandoned. Reforms have pushed up prices, and today it's seen as the most important policy tool for delivering the industrial transition.

On 27 May, the Mistra Carbon Exit research programme hosted a breakfast seminar on the EU ETS, which has now been operating for 20 years. The seminar reviewed how and why the system was created, its significance in reducing emissions within the EU, and what is required for industry to make the transition.

Today, the EU ETS is described as a cornerstone of EU climate policy, but for many years the system was almost irrelevant due to the low price of emission allowances. However, thanks to reforms, the system has been tightened up, leading to a price increase from around five euros per tonne of carbon dioxide to around 70 euros today, according to Lars Zetterberg at IVL Swedish Environmental Research Institute.

He highlighted ‘the Swedish proposal’ as one of the key factors. It meant that the surplus of emission allowances in the system – equivalent to 50 times Sweden's emissions – was cancelled, resulting in a significant price increase. The EU's ‘Fit for 55’ legislative package, which aims to reduce the EU's greenhouse gas emissions by at least 55 percent by 2030, has also been crucial in increasing the price of emission allowances.

Emissions trading has proven effective: research shows that it led to a reduction in carbon dioxide emissions of around 10–16 percent between 2005 and 2012.

We can also see that emissions trading has had little effect on the economy as a whole, and has not led to any carbon leakage, i.e. industries moving their operations from the EU to other countries, said Åsa Löfgren, researcher at the University of Gothenburg.

The system has contributed to the phasing out of coal in the EU, and the price is now approaching levels where green steel and green cement can compete with traditional steel and cement.

But what more is required of the EU ETS, and is this policy instrument sufficient to transform industry? Filip Johnsson of Chalmers University of Technology stressed the importance of not weakening the Fit for 55 package and that an active and clear industrial policy will be needed to reduce the risks for industry, so that it can make the initial investments in the transformative technologies that will be required to significantly reduce carbon dioxide emissions.

The price of emission allowances needs to be sufficiently high, but also stable and predictable, said Filip Johnsson.

He went on to point out that it is important to have a driver for reducing emissions along the industry's value chains – from raw materials to end products.

One positive factor is that the introduction of transformative measures to eliminate carbon dioxide emissions in the raw materials industry will only have a minor impact on the price of products at the end of the value chain. This is good news, as it will probably be possible to charge a premium price for carbon-neutral products.

Although the EU ETS has the potential to be a powerful tool for reducing emissions, historically it has not sufficiently stimulated investment in expensive but necessary technologies such as CCS. Thus, to accelerate the transition, complementary policy instruments and clear political signals are needed.

The seminar also looked ahead to what will happen when the emissions cap approaches zero, which will happen in 2039. At that point, emissions are expected to exceed 100Mt of carbon dioxide equivalents within the trading system.

To prevent the price of emission allowances from becoming unreasonably high, there are several scenarios. One is to allocate a limited number of emission allowances to industry; two is to let participants use credits representing negative emissions; and three is to replace emissions trading with industry standards or a carbon tax, said Lars Zetterberg.

For more information about emissions trading, see the MCE report: EU Emissions Trading System – Implications of the 2023 reform and prospects for the 2030 External link, opens in new window.

If you have questions, please contact:
Lars Zetterberg, lars.zetterberg@ivl.se, tel. +46 (0)10-788 65 57
Filip Johnsson, filip.johnsson@chalmers.se, tel. +46 (0)31-772 14 49

The Mistra-funded research programme Mistra Carbon Exit has more than 30 partners, including universities and research environments in Sweden and internationally, a number of Swedish industrial companies and government agencies. It began in 2017 and will conclude in spring 2025. Read more about it here: Mistra Carbon Exit External link, opens in new window..