The European Emission Trading System (ETS) has emerged as the backbone of the EU Climate Action and, especially in the last two years, as a crucial driver of decarbonization. The cap-and-trade system puts a price on carbon while ensuring GHG emissions decline through its cap. Market participants can trade emission allowances to compensate for the CO2 they emit. The EU ETS aims to facilitate cost-efficient decarbonization.

The EU ETS is the first and most developed carbon market across the world and covers more than 40% of all EU emissions. Over its first three phases, between 2005 and 2020, many reforms have been implemented to increase its effectiveness and market functioning. Since 2018, reforms for phase IV have been implemented and the ETS revision is also a large component of the Fit For 55 package, proposed by the Commission in July 2021. A revised EU ETS Directive was adopted in 2023, for the period running until 2030.

Since ERCST’s inception, the EU ETS policy file has been central to ERCST’s efforts to facilitate cooperation between policymakers and other stakeholders in articulating cost-effective climate policy. Throughout the years, ERCST has organised numerous roundtables, circulated a wide range of publications and in the process, took a place among global thought leaders on the subject.

ERCST’s work on the EU ETS can be subdivided into three different strands:

State of the EU ETS
Future of the EU ETS
The Future of Agriculture in the EU ETS

State of the EU ETS

The EU ETS has always been presented as an important component of the EU climate change policy. How well it delivers is critical for the overall delivery by the EU on its climate change commitments.

Each year, ERCST together with its partners, publishes the State of the EU ETS report. This report is intended as a “snapshot”, providing policymakers and stakeholders with an overview of how the EU ETS is doing by April of each year, based on previous year data. Within the constraints posed by the lack of publicly accessible data, the Report tries to assess the question whether the EU ETS is “fit for purpose”.

In 2024, the 9th annual report will be produced together with the Wegener Centre on Climate and Global Change, BloombergNEF and Compass Lexecon. In addition to the report, the project aims to bring together small groups of stakeholders deeply involved in EU ETS discussions, through meetings held in Brussels and in other EU Member States.

Future of the EU ETS

The EU ETS is seen as one the important drivers since it came into operation in 2005. However, as we reach end of 2020’s and forward middle of 2030, there are many issues that need to be discussed – fundamentally if the EU ETS is the right instrument as we reach towards zero allowances and what architecture and governance it should take.

The Future of the EU ETS is a process that ERCST is putting into place as an independent review to have the EU institutions and EU stakeholders in this important debate. In the framework of this sub-workstream, ERCST will organise thematic events along the year focused on key issues for the EU ETS: carbon removals, ETS extension to new sectors, governance, etc.

The Future of Agriculture in the EU ETS

Agriculture is responsible for 13% of EU’s GHGs, and the sector’s emissions have not decreased since 2010. Following the example of the recent extension of carbon pricing to road transport and buildings, emission trading in agriculture could provide the right incentives to decarbonise this sector.

This workstream will explore with stakeholders and policy makers the role agriculture can play as part of net zero, with a focus on its potential extension to carbon pricing. It will address how feasible is pricing agricultural emissions and rewarding climate action in the land sector.