The Preliminary data released by the European Commission shows that installations and aviation regulated under the EU Emissions Trading System (EU ETS) reported a 0.5% reduction in emissions in 2015, at a total of 1.670 billion tonnes CO2 equivalent (CO2e).
The EU ETS covers emissions of carbon dioxide, nitrous oxide, and perfluorocarbons. Sectors included under the scheme are power and heat generation and energy-intensive industries such as oil refineries, steel works, and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids, and bulk organic chemicals. Aviation was also brought under the scheme in 2012, which means that all flights from, to, and within the European Economic Area (EEA) are included in the EU ETS.
The EU ETS works on the ‘cap and trade’ principle. The overall volume of greenhouse gases that can be emitted each year by these installations is capped across the EU and allowances are issued against this cap. Installations receive or buy emission allowances, according to their sector, which they can trade if they wish. The cap reduces each year, which means that, by 2020, emissions in the power and industrial sectors will be 21% lower than in 2005. The aviation sector has its own cap for the whole 2013-2020 trading period at 5% below the average annual level of emissions in the years 2004-2006.
Analysis of the 2015 emissions figures from the think tank Sandbag shows that emissions from power and heat fell by 0.6%. Emissions from European industry fell by just 0.3%, but if the reduction in emissions in the UK steel industry was removed from the calculation, they actually remain unchanged.
Total EU ETS emissions for 2015 were lower than many had expected, particularly as 2014 had already seen a 4.5% fall in emissions due to it having been a record mild year. In addition to the weather returning to normal in 2015, GDP rose by 1.9% across the EU28 countries, compared with 1.4% in 2014 (Eurostat). However, emissions still declined, signifying a decoupling of the link between emissions output and economic growth as gas-fired generation and the uptake of renewables increases.
The output of emissions has been traditionally linked to economic output, and, during periods of reduced economic output, the price of EUAs has fallen due to there being a surplus of allowances in the market, as can be seen in the chart below.
Chart Source: Thomson Reuters Eikon
While it is good news for the environment that emissions are well below the EU ETS cap, a higher carbon price would drive investment in low carbon technologies as there would be greater monetary value to the emissions saved. A mechanism known as the Market Stability Reserve is being introduced in 2019 as a means of addressing the oversupply of allowances.
In the UK, the Carbon Price Floor has been introduced as a top-up to the low price of EU Allowances and this has been criticised by industry as creating an uneven playing field compared to the rest of Europe. Interestingly the French Environment Minister has recently called on experts to develop proposals for the implementation of a price floor for the EU Allowances.
Developments in the EU ETS and the impact they have on the price of EU Allowances is of importance to energy buyers as it affects the costs of generating electricity, which is ultimately passed through to the consumer.
