The cost of carbon emission permits on Tuesday reached a record high of 100 euros ($107) per ton in Europe’s carbon market, the oldest in the world. But who in Europe must pay the CO2 price, and what is ETS?
The amount of CO2 emissions that a sector, or group of sectors, may produce is capped by the emissions trading system (ETS) of the European Union. To ensure that emissions decrease over time, the cap is lowered each year.
Companies are required to purchase EU Allowances (EUAs), or CO2 permits, from the system for each ton of CO2 they release.
Which sectors are affected by the rising costs of CO2?
More than 10,000 manufacturers, power plants, and airlines operating within Europe are required to submit EU carbon permits annually for their emissions under the EU’s ETS, which was started in 2005 and currently accounts for around 40% of total EU emissions.
In order to achieve its climate change goals, the system is the EU’s main program for cutting greenhouse gas emissions. The EU has pledged to reduce net emissions by 55% from 1990 levels by 2030.
The EU has agreed to include shipping in the EU ETS by 2026 and to introduce a different ETS in 2027 that will cover emissions from fuels used in transportation by road and for building heating.
Is it one-size-fits-all CO2 paying?
Since CO2 permits are exchanged openly, the cost to businesses, traders, and investors who purchase them are uniform.
Higher carbon costs force industries to either bear the expense themselves, as the power sector does, or pass it along to consumers, which reduces margins.
While enterprises in the power industry must purchase all the licenses necessary to cover their emissions, the EU provides free permits to a number of industrial industries each year, lowering the costs of compliance. It is known as free allocation.
In the EU ETS, about 57% of the carbon permits are auctioned, with the remainder being distributed free to businesses.
Free permits? Yes, please
Free permits are offered to industries judged vulnerable to “carbon leakage”, the danger that high carbon costs might push businesses to relocate outside to regions without carbon charges. Critics claim by making it cheaper to pollute, free permits have weakened the motivation for industry to cut their emissions.
The government provides free licenses to more than 40 industries that are thought to be prone of carbon leakage. They consist of steelworks, iron, aluminum, and metals producers, cement, lime, glass, ceramics, pulp, paper, fertilizers, and organic chemical makers, as well as refineries for oil.
Free allocations: Shrinking the circle
Many sectors received all the permits they required for free in the early years of the EU ETS. In recent years, the EU power sector has seen a much faster reduction in emissions than industry. It’s because power sector must purchase all of its CO2 permits,
A baseline is provided for each industry that reflects the emissions from the top 10% of installations in that business. Each year, the criteria get a little lower.
Installations that satisfy the standard receive all the necessary permits. Less polluting factories are an incentive to invest in since more polluting installations are not.
The quantity of free licenses granted to businesses has been reduced as the EU works to reach its climate goals. According to the system’s original plans, the industry will receive 80% of its permits in 2013 and 30% in 2020.
As the EU has decided to phase out free allocation for the industry by 2034. The requirements will likely become more stringent this decade.
More than 80% of airline licenses are provided without charge. But the EU has agreed to require carriers to pay for all of their permits by 2026.