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EU ETS has reduced CO2 emissions in spite of low prices

Published April 16, 2020

EU ETS has reduced CO2 emissions in spite of low prices

A recent study published by the Proceedings of the National Academy of Sciences of the United States of America (PNAS) has shown that the European Emissions Trading System (EU ETS) has been able to reduce CO2 emissions despite low prices. 

The EU ETS is a cap-and-trade scheme that allows governments to set allowable total emissions and issue tradable emission permits (each one ‘worth’ one tonne of CO2), which can then be used as currency in carbon markets. The system is the cornerstone of the EU’s carbon emissions reduction initiative under the Kyoto Protocol. 

The study follows a recent report by the Organisation for Economic Cooperation and Development (OECD) wherein concerns were raised concerns that cheap permits would not be enough of an incentive for polluters to reduce carbon emissions and invest in abatement technology. This is due to a widely held belief that carbon markets require high prices to reduce emissions but are often considered to be set. 

However, PNAS cited several studies that have found that some regulated firms were not deterred by low EU ETS pricing and have gone on to control their emissions, whether through reductions or abatement. In fact, in the PNAS study, it was found that, between 2008 and 2016, EU ETS saved around 1.2 billion tonnes of CO2, which accounts for close to half of the EU governments’ commitments under the Kyoto Protocol. 

It is important to note that the estimated emission reductions are on top of any emission reductions that may have occurred during the 2007/2008 financial crisis, when there was reduced economic output. The research also pointed out that some of the reductions may be due to production being moved outside of the EU, possibly into countries where there are no carbon markets, often referred to as carbon leakage. 

All in all, the researchers have found strong statistical evidence that the EU ETS reduced CO2 emissions overall, even taking into account the lower emissions in 2007/2008. However, due to possible carbon leakage (moving production to other countries), it’s not possible to tell if EU ETS also affected global emissions. 

“The appeal of carbon markets is that, once they are established with the right rules, you can connect them to other markets. Climate is not concerned about whether emissions are reduced in the UK or Germany or China; so long as they are reduced, that helps to address the problem. If you have carbon markets scattered across the world, you might be able to trade across those markets,” said Dr Bayer, a Chancellor’s Fellow in Strathclyde’s School of Government & Public Policy and lead author of the study. 

The PNAS study looks at the effectiveness of the EU ETS relative to the case of no carbon markets. It does not take into account any possibly more effective policies that could have been put in place. As more and more countries are adopting carbon markets to regulate greenhouse gas emissions—China is on course to introduce their scheme this year—the continued success of EU ETS can act as a beacon, especially when backed by this research, 

Though the study ran up to 2016, recent news has been promising as well. 

In an article from Montel at the beginning of the month, it was stated carbon emissions under EU ETS were lower by 2.5% in 2019, beating expectations.