2022 State of the EU ETS Report

2022 State of the EU ETS Report

Author(s): Andrei Marcu, Juan Fernando López Hernández, Emilie Alberola, Anouk Fare, Bo Qin, Mariko O’Neill, Stefan Schleicher, Jean-Yves Caneill, Elena Bonfiglio, Anita Vollmer

The annual “State of the EU ETS” Report aims to provide an independent contribution to the policy debate, which is needed to ensure that the EU ETS is “fit for purpose”. The 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.

Takeaways:

  • This report marks the beginning of Phase 4 of the European Union’s Emissions Trading System (EU ETS), which started in 2021 and is marked by debates in line with a new climate ambition target. The European Climate Law is providing a new reality to become net zero by 2050. However, the EU ETS debate may not be as visible as in the past since other elements of the Fit for 55 package such as the CBAM, have become the focus of attention. ERCST would argue that the focus must remain on the EU ETS.
  • The year 2021 was not only marked by a period of completing secondary legislation coming from the revision of the EU ETS Directive in 2018 but has also brought a proposal from the Commission to revise the current framework. The new rules are expected to apply from 2023, pending the success or failure of the upcoming negotiation process between the European Parliament and Council.
  • While some elements are still at stake, Phase 4 of the EU ETS is the first one without UK installations. The need to achieve a worldwide climate compromise and the recent discussions in international forums (i.e., COP 26) has showed the need to further envisage the role of the EU ETS and international carbon markets, aiming for potential links under Article 6 of the Paris Agreement.
  • In 2021, ahead of the Commission proposal to revise the EU ETS Directive, presented in July 2021, the stakeholder community looked optimistic about the possibilities of the EU ETS embracing the climate goal. Nevertheless, the annual market sentiment survey shows some questioning of the role of the EU ETS in some areas. Still, stakeholders consider the EU ETS as the pillar of the EU climate policy and as one of the best, if not the best, of the instruments to drive decarbonisation.
  • Following the previous year’s reports, this report shows the dynamics of emissions in different sectors. Estimates based on preliminary data indicate a 9.1% increase of total emissions in 2021 compared to 2020. Still, the dip in emissions caused by lower economic activity due to the COVID-19 crisis in 2020 had not yet been overcome in 2021.
  • We cannot disregard that last year the EU was impacted by an unprecedent increase in energy prices. The discussion has also been revolved around the relationship between the energy and the carbon market and the increased high volatility of carbon prices. The role of speculators and the different treatment of compliance entitles, for which the EU ETS is a compromise to achieve efficient decarbonisation rather than an opportunity to obtain profits, has raised questions about the current provisions to address excessive market price fluctuations, and the need to include these considerations in the EU ETS review.
  • Finally, some see this as the time to start exploring the role of the EU ETS post 2030.

This report is jointly produced by ERCST, BloombergNEFthe Wegener Center and Ecoact .