Emissions and emissions trading scheme
With the March 2019 Green Finance Observatory report stating that "carbon markets are likely to be more vulnerable than traditional markets", it is a good time to examine some of the current trends in the European Emissions Trading Scheme (EU ETS).
As a reminder, an emissions trading scheme is a market mechanism that can be used to reduce GHG emissions. The regulatory entity sets a total emissions cap that is applied to one or more sectors of the economy, contributing in this way to the achievement of the national or territorial GHG emissions reduction target. Once the cap is established, the regulatory entity distributes allowances to companies, with each allowance representing one ton of GHG emissions and allocated either free of charge or sold via auctions. Companies in these sectors will then manage their allowances by reducing their emissions, buying excess allowances from other companies, or by covering part of their emissions with carbon credits from reduction projects in sectors not covered by the emissions trading scheme. In the EU, only the stationary installations and aviation sectors are covered by the EU ETS.
In the graph below, let us look at the verified emissions of the different sectors of stationary installations and their free allowances allocated within the EU ETS between 2013 and 2017.
Verified emissions and allocated allowances of stationary installations in the EU ETS
On the left side of the graph, we see that the share of combustion of fuels contributes about two-thirds of the total verified emissions of stationary installations; a large majority of this share is in the power sector. Other emissions from stationary facilities come from four main sectors: refining, steel, cement and bulk chemicals. Emissions for the EU ETS as a whole show a downward trend from 2013 to 2016, but for the first time since 2010, total emissions increased again by 0.6% in 2017, which is explained by an increase of industrial emissions while emissions from combustion remained stable.
On the right-hand side of the graph, we see that the total allocated emissions are not exactly equal to the verified emissions. This illustrates the increasing difficulty of the regulatory entity’s task of allowance allocation in an emissions trading scheme. It can also be seen that during the trading period between 2013 and 2017, approximately more than 50% of the total quantity of allowances are auctioned while the remaining allowances are allocated free of charge; for the refining of mineral oil, almost all the allowances are allocated free of charge.
It should be noted that in other regions of the world other sectors are covered by the local emissions trading systems. For example, in South Korea and New Zealand, the construction, transport and waste sectors are covered in addition to the sectors covered in the EU ETS.
Félix Fouret, Carbon/Climate Analyst
Source: Beyond Ratings, Green Finance Observatory, European Environment Agency