EU Emissions Trading System: Reform proposal poses risks to climate action in the EU

The European Commission’s reform proposal for the European Union Emissions Trading System (EU ETS) poses significant climate risks. A new analysis by Oeko-Institut, commissioned by WWF Germany, shows that the planned reduction in the emissions cap alone is insufficient to ensure the EU meets its 2040 climate target. Additional emission allowances and surpluses from previous trading periods could allow companies to emit far more greenhouse gases than is compatible with the climate target.

Jakob Graichen
Senior Researcher, Energy & Climate Division

Additional emission allowances of up to 620 million possible

According to the calculations, the additional supply of allowances in the fifth trading period (from 2031 to 2040) could exceed the demand compatible with the climate target by up to 620 million allowances. This equates to an additional supply of up to 10 percent. If these allowances were to be used for emissions within the EU ETS, other economic sectors would need to reduce their greenhouse gas emissions by a similar amount. If further quantities were utilised, for example from the Market Stability Reserve, the shortfall in meeting the target would be even larger.

Therefore, Oeko-Institut recommends that all allowances be accounted for within a binding and transparent overall budget. This budget would include allowances to finance permanent carbon removals from the atmosphere, as well as the so-called Investment Booster, which is intended to support climate-friendly investments. Additional allowances for carbon removals should only be issued if these removals actually take place.

Consistently reduce the emissions cap and limit surpluses

The current annual reduction rate of the emissions cap, at 4.4 percent, should be maintained until 2035. By this time, the last major coal-fired power plants are expected to have left the market, while there will still be surplus allowances available.

Additionally, the Market Stability Reserve should continue absorbing 24 percent of surplus allowances each year. Its thresholds must be adjusted more closely to the declining total volume of available allowances.

Aligning climate targets across economic sectors

The emissions budgets for the EU ETS should be set in conjunction with those for transport, buildings, agriculture and other sectors. Additional carbon sequestration through forests and other forms of land use cannot reliably close potential gaps in climate protection, as it is associated with considerable uncertainties.

International carbon credits under Article 6 of the Paris Agreement should not be used to offset shortfalls in emission reductions by ETS sectors. Instead, they should serve to safeguard against overall shortfalls in meeting targets, for example where CO₂ sequestration by forests and other sinks fails to materialise. This requires strict requirements regarding the quality, crediting and procurement of these credits.

Study entitled ‘The EU ETS and the 2040 target’ by Oeko-Institut

This study was conducted by Oeko-Institut Consult gGmbH.

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