The EU ETS and the 2040 target

The European Commission’s proposed reform of the European Emissions Trading Scheme (EU ETS 1) poses risks to the achievement of the EU’s 2040 climate target. An analysis by the Öko-Institut, commissioned by WWF Germany, shows that the planned reduction in the emissions cap alone is not sufficient to ensure compatibility with the climate target. Rather, the total volume of available emission allowances is the decisive factor.

The calculations show that, in the fifth trading period from 2031 to 2040, the supply of allowances could exceed the demand compatible with the climate target by up to 620 million allowances, or ten per cent. This is due to additional allowances intended to finance permanent CO₂ removals and investment support programmes, as well as surpluses from previous trading periods. If these allowances are used for additional emissions, other sectors would have to achieve correspondingly higher emission reductions in order to meet the EU climate target.

The analysis therefore recommends that all available allowances be taken into account within a transparent emissions budget. Additional allowances intended to finance CO₂ removals should only be issued once the removals have actually taken place. Furthermore, the annual reduction rate of the emissions cap should remain at 4.4 per cent until 2035. The Market Stability Reserve must also continue to absorb surplus allowances and limit long-term market surpluses.
Furthermore, the climate targets of the emissions trading scheme and the other economic sectors should be aligned. International carbon credits should primarily serve as a safeguard against risks to achieving these targets. The analysis makes it clear that the EU Emissions Trading Scheme reform must take the entire supply of allowances into account in order to ensure effective emissions reductions in line with the 2040 climate target.