New EU Emissions Trading System: what should change?

Set up in 2005, the EU Emissions Trading System (ETS) is the world's first international emissions trading system. Since its establishment, the concept has had plenty of detractors.

Many climate activists considered the market-oriented cap-and-trade approach to be flawed, saying taxes would be more effective to reduce global warming emissions. But cap-and-trade schemes were the global consensus at the time. The ETS has been confronted with several challenges ever since, most notably a carbon price which is generally deemed to be too low.

The current EU carbon market price currently stands at over 50 euros, up from 20 euros a year ago, dramatically increasing costs for polluters. But the global average carbon price is currently only $2 a tonne; too low to trigger the kind of energy transformation needed to stop climate change.

Now, with the UK set to leave the EU ETS and replace it with something else such as a carbon tax, and the incoming US administration of Joe Biden sounding unenthusiastic about cap-and-trade, EU policymakers are being prompted to think about other ways to price carbon.

The European Commission is proposing to revise and possibly expand the scope of the ETS. They claim the ETS proves that putting a price on carbon is possible and makes economic sense, helping to move further towards a low carbon greener future.

Overall, views differ on the ultimate success of the ETS. The system achieved the objective of reaching the level of emissions reductions fixed by its emission cap. However, it is difficult to directly attribute the emissions reductions to the ETS alone, as other policies in each sector covered by the system may have contributed. Policymakers considered that just meeting the emissions cap was insufficient. Recent revision and reform of the system reveals the view that its role should also be to drive more fundamental changes in the economy, through both a stronger carbon price signal and use of revenue.

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