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The European carbon market

June 2015

Paula Coussy

 

 

  

 

Five questions to Paula Coussy,

CO2 Market Expert

 

1) What is the purpose of the European carbon market?

The European Union Emissions Trading Scheme, or EU-ETS (European Union Emissions Trading Scheme), currently covers 16,400 power stations and industrial plants responsible for the majority of greenhouse gas emissions. The ultimate aim of the EU-ETS is to reduce greenhouse gas emissions from these facilities by obliging them to measure, report and control their emissions, failing which they have to pay a non-compliance penalty.

  

2) Is the European carbon trading market the only one of its type in the world?

The European Union emissions trading scheme, launched in 2005, was the world's first major CO2e (1) emissions trading scheme. Today, it is no longer alone and at the end of 2014, there were 17 emissions trading schemes in operation around the world. Moreover, China will be launching its own, eagerly awaited national emissions trading scheme in 2016.

Carbon trading markets are not all national. They come in a variety of forms, covering various geographic areas or legal jurisdictions. In the United States, for example, there is no federal carbon market but a regional market for California and a multi-regional market encompassing 9 jurisdictions in the North East, known as the RGGI (Regional Greenhouse Gas Initiative). China has 7 pilot markets covering 7 major cities.

While the number of emissions trading markets has increased in recent years, the European market is the oldest and also, today, the biggest in terms of the volume and value of trading that takes place. It accounts for between 80 and 90% of global trading in CO2e allowances.

(1) CO2e: other greenhouse gases are converted into metric tons of CO2 equivalent.

 

3) Is every economic sector included in the European emissions trading scheme?

No, two major economic sectors are not included in the European emissions trading scheme, namely the transport sector (other than aviation), and the tertiary residential sector. These sectors are associated with highly diffuse greenhouse gas emissions and would generate excessive compliance costs.

Within the sectors concerned, smaller installations with average emissions of less than 25,000 tons of CO2e per year are excluded from the emissions trading scheme.

  

4) Why is the price of the allowance so low on the European carbon market?

It stems from the classic supply and demand scenario that exists in the market. There is a surplus of CO2e allowances available, i.e. the supply of allowances exceeds the demand expressed by the installations concerned.

To overcome this problem of excessively low trading prices on the EU-ETS market, two important measures have been adopted at European level:

  • A measure known as backloading: 900 million tons of allowances are gradually withdrawn from the market (via auctions) to be reintroduced in 2020.
  • The MSR (Market Stability Reserve) reform, aimed at withdrawing additional allowances from the market as soon as a surplus of 400 million tons of allowances is observed in any year.
      
 
5) What does the future hold for this market? Will it be discussed during COP21?

Generally speaking, carbon emissions trading systems are not discussed during COPs and the same will probably be true for the COP21 in December 2015 in Paris. However, during these international negotiations, national objectives relating to greenhouse gas emissions - the bedrock of these markets - will be discussed.

Without ambitious international political commitments it will be difficult to justify the continued existence within the European emissions trading market of highly restrictive objectives weighing heavily on industrial sectors facing considerable international competition.

More information about COP21 http://www.cop21.gouv.fr/en

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