Brussels Not only climate protectors are big fans of European emissions trading. Economists in particular are still delighted that the EU created this system almost 20 years ago – and that it actually works.
Because economists are interested in how goals can be achieved efficiently – i.e. at the lowest possible cost. And emissions trading means that CO2 is saved where it is cheapest.
It’s actually quite simple: the EU grants industrial companies the right to emit CO2. A company that burns coal or gas must be able to show a corresponding number of CO2 certificates. The EU is reducing the number of certificates from year to year. In 2050 there will be none of them at all.
This means that CO2 emissions will then be banned and all companies will have to operate in a climate-neutral manner. So the EU is forcing companies to invest in new technologies: in solar cells instead of coal-fired power plants, in heat pumps instead of oil heating, in green hydrogen instead of natural gas.
Now comes the special thing about the European system: companies can also save more CO2 than planned and sell their excess CO2 certificates. Or they can emit more CO2 and buy additional certificates for it. This is emissions trading, which is called “ETS” (for “Emission Trading System”) in technical jargon.
What is the advantage of the European approach to climate protection?
Emissions trading creates a market for CO2 emissions and the price per ton adjusts based on supply and demand. This means that CO2 is saved exactly where it is cheapest.
The plants that emit a lot of CO2 and can be replaced with clean technology at low cost are shut down first. At the same time, there is a strong incentive to minimize energy waste.
Climate protection causes enormous costs for the economy. But emissions trading at least means that the greatest possible amount of CO2 is saved for this money. The EU is banking on becoming a role model for others and making decisive progress in climate protection.
>> Read here: Nuclear power 2.0: This is the future of nuclear energy
Other countries do not yet have such a system. In China, coal-fired power plants are sometimes shut down overnight at the behest of the central government. In the United States, clean technologies have recently been subsidized with large sums of state money – in the hope that other industries will eventually give up. Both are significantly less efficient than the European model.
What will the reform of emissions trading bring?
The EU is in the process of noticeably tightening emissions trading. Private individuals and small companies will also have to pay for their CO2 emissions in the future. The money raised in this way is to be used to insulate apartments and to buy modern heating systems such as heat pumps.
Industry is being asked to make faster savings than has been the case up to now. New areas such as ship traffic are included in the system. And CO2 taxes are also to be paid on imports. The changes in detail:
Individuals and small companies have to pay
In the future, a CO2 price will also be charged on petrol and diesel as well as on heating oil and gas. This price should be lower than that paid in the industry, i.e. no more than 45 euros per ton by 2030. This would make diesel around ten cents a liter more expensive. We are talking about an “ETS 2”. Little will change for German consumers: there is already a CO2 price in Germany, which is to be transferred to the European system.
Small businesses that are exempt from previous emissions trading are also affected. Relevant costs arise above all for those who need heat for their production, such as bakeries or other craft businesses.
>> Read here: Debate on the future of e-fuels: “With all due respect, this is complete nonsense”
The introduction is good news for small German companies in international competition: it reduces the disadvantage they have compared to the competition. However, the German CO2 price will be slightly higher than the European price.
Social fund supports ecological transformation
The EU wants to cushion the burdens of needy consumers with a climate social fund, which can be used to promote the energetic renovation of social buildings and the purchase of efficient heating systems.
This fund is to be filled with 86.7 billion euros over the years 2026 to 2032. The income for this comes primarily from ETS 2 and from national budgets.
>> Read here: The EU wants to oblige owners of older houses to put more money into insulation. What exactly is planned
Emissions trading incurs high costs for industry
The aim of emissions trading is to reduce climate damage. In order for this to happen faster, the CO2 certificates will be reduced much faster than previously planned. By 2030, the affected sectors may only emit 62 percent of the amount of CO2 that was emitted in 2005. This will be achieved by eliminating 117 million allowances and reducing the number of allowances issued by 4.3 and later by 4.4 percent annually. The price of CO2 emissions will rise as a result and the conversion to clean technologies will pay off more quickly.
So far, some sectors have benefited from the fact that they have been freely allocated CO2 emission rights. These allocations are to be significantly reduced for most sectors over the coming years and expire by 2034. This will significantly increase the cost of steel and aluminum in particular.
The most important areas of the chemical industry and also the manufacturers of ceramics, paper and glass will continue to be allocated emission certificates free of charge for the time being. By 2030 there should be a concept how they too have to pay for the greenhouse gases they cause.
EU border adjustment: CO2 price planned for imports
Anyone who produces goods abroad and then sells them to Europe should also pay a CO2 price. This affects precisely those goods for which free allocations in the EU will no longer apply: steel, aluminum, fertilizer, cement, electricity and hydrogen. The amount of this CO2 border adjustment should correspond to the costs of emission certificates in the EU. In technical terms, the instrument is called “Cbam” (for “Carbon Border Adjustment Mechanism”).
The aim is fair competition within the EU and prevention of “carbon leakage”, i.e. the migration of CO2-intensive industries abroad. Nevertheless, the European economy fears competitive disadvantages compared to foreign competitors as a result of the reform.
If, for example, a European and a Turkish company deliver steel to the USA, the Turkish company does not have to buy CO2 certificates, but the European one does. The European steel and aluminum manufacturers therefore continued to demand free allocation of CO2 certificates for exports.
This requirement is not being met because it probably contradicts World Trade Organization (WTO) law. Instead, the affected sectors are now to be given particularly intensive support with state money in their investments in clean technologies. The funds for this come from emissions trading. The economy is not satisfied with this solution.
Although the EU has renounced export subsidies, trading partners such as the USA have already made it clear that they regard the new EU border adjustment as an unfriendly act. Because their companies would have to pay the new border adjustment for imports in the USA in the future. Some observers consider the instrument to be likely to be sued at the WTO.
EU emissions trading covers international shipping
In the future, emissions from ships docking at European ports must also be covered by emission certificates. This will make imports and exports more expensive and give shipowners an incentive to switch from diesel engines, which are very harmful to the climate, to clean propulsion systems. Port cities also expect better air quality from this.
More: The EU strengthens the hope of saving the climate – a comment