EU ETS Review: Issues and Levers

Author(s): Andrei Marcu

Takeaways:

– The EU ETS may not be loved by everyone, but short of altering its stance on climate change policy or coming up with an alternative instrument that is better, the EU ETS is the EU’s best choice – even for those that love to hate it.

– However, the EU ETS must evolve to ensure that the transition is sustainable – that is, the environmental, economic and social axis must move in synchronism. This is the definition of sustainability. Otherwise, we only pay lip service to sustainability

– The speed of decarbonization and accompanying conditions are important to make the transition sustainable. The surrounding conditions are not an afterthought, they are not a “nice to have” – they are essential, and their importance cannot be emphasized enough. Conditionality works in many directions

– The EU ETS that emerges needs to take into account current conditions, which are significantly different, and one could say, more difficult, from the last Review. That includes, but not only, the financial firepower of the EU, geopolitical circumstances, and the competitive stance of EU industry vis-a-vis its main trade competitors

– The Review must also consider the end game – what is the place and role of an EU decarbonized society in the world close to mid-century (which is not very far away)?

– The Review should ask all the hard questions and start looking for permanent, structural solutions, not temporary, quick and easy fixes – at this time there cannot be any sacred cows. If we get it wrong, many players may not be around for the next round.  A few issues that have been raised may be radical, but that should disqualify them from an examination and answer:
o   Is the EU ETS he right instrument in the second half of the 2030s and if not, what is the after-EU ETS solution?
o   Can CBAM, the guarantor of the EU ETS and industry competitiveness deliver, or do we need to look at more tailored CBAM solutions?
o   The number of EUAs is declining, but the number of CBAM permits is infinite – is this right from an environmental, ethical and competitive point of view? And what are the market implications?
o   Is the MSR still needed in its current function?

–  To a large degree the EU ETS has always kicked the ball downfield. While there has been movement, the EU is still far in front which implies an increased focus on climate diplomacy and giving serious consideration that the outcome of the Review factors in what others do relative to the EU.

– The world is moving faster-and-faster and to be able to adapt, and respond, the governance of the EU ETS is critical, especially now when the easy, low hanging fruit have been picked.