EU Carbon Market

Question 1

How much (in %) of total energy demand could hydrogen provide in EU by 2050?

Answer 1

24%

Question 2

What are the two main categories of carbon markets in Europe?

Answer 2

Emissions trading system (ETS) and a voluntary scheme defined by the Paris Agreement. ETS is colloquially a cap and trade mechanism that sets mandatory GHG emission cap and emission credits are allocated to participants under the total cap. Voluntary scheme allows for more ambitious mitigation actions.

Question 3

How important is ETS to Europe?

Answer 3

ETS is cornerstone of EU’s fight against climate change and is world’s first major carbon market, remaining the world’s largest (>¾ of the world’s international carbon trading).

Question 4

What does “20-20-20 by 2020”, the EU’s current comprehensive climate policy slogan, refer to?

Answer 4

It refers to refers to the three targets to be achieved by 2020:

1) a 20 percent reduction of GHG emissions from 1990 levels;
2) a 20 percent share of total energy consumption from renewable energy; and
3) a 20 percent improvement in energy efficiency.

Question 5

How many power stations and industrial plants across EU does the European Emissions Trading System (EU ETS) include?

Answer 5

EU ETS includes more than 11,000 power stations and industrial plants across EU, 1,000 of which are in the UK.

Question 6

How does the EU ETS work?

Answer 6

The EU ETS works on a ‘cap and trade’ basis, so there is a ‘cap’ or limit set on the total greenhouse gas emissions allowed by all participants covered by the System and this cap is converted into tradable emission allowances.

Question 7

What is the aim of the EU ETS?

Answer 7

As the first and largest cap and trade system, EU-ETS is intended to achieve immediate AND long-term emissions reduction objectives in a cost-effective and economically efficient manner.

Question 8

What has been the state of the EU carbon market over the past 16 months?

Answer 8

EU carbon market has been the hottest commodity market in the world over past 16 months, with European carbon allowances (EUAs) up 310% since May 2017, 120% since the start of 2018, and 33% since start of April.

Question 9

How do carbon markets aim to reduce greenhouse gas (GHG, or “carbon”)?

Answer 9

Carbon markets aim to reduce greenhouse gas emissions cost-­effectively by setting limits on
emissions and enabling the trading of emission units, which are instruments representing emission reductions.

Question 10

What does trading within carbon markets enable?

Answer 10

Trading enables entities that can reduce emissions at lower cost to be paid to do so by higher-cost emitters, thus lowering the economic cost of reducing emissions.

Question 11

What are tradable allowances?

Answer 11

They are tradable emissions permits which represent the right to generate a metric tonne of carbon dioxide equivalent.

Question 12

How do tradable allowances work?

Answer 12

They are allocated to the emitters covered under the cap. At the end of a specified reporting period, the covered entities must surrender allowances equivalent to the GHG emissions they produced during the period. Entities whose emissions exceeded their allocations may purchase excess allowances or other eligible instruments to fill the gap, or pay a fine.

Question 13

How does ETS work in Switzerland?

Answer 13

Switzerland’s ETS allows companies to use international offsets to meet up to 8% of their compliance requirement. EU allowances are tradable and bankable against Swiss allowances. The Swiss and EU are discussing linking their ETSs.

Question 14

How can an ETS generate revenue for the government?

Answer 14

Through the sale/auctioning of allowances, and for covered entities through the sale of excess allowances.

Question 15

In what countries does the European Emissions Trading System (EU ETS) operate?

Answer 15

In all EU countries plus Iceland, Liechtensten and Norway.

Question 16

How much (in %) of GHG emissions does the EU ETS cover?

Answer 16

Around 45%.

Question 17

Which gases does the EU ETS cover?

Answer 17

1) Carbon-dioxide (CO2) from power and heat generation, energy-intensive industry sectors, and commercial aviation;
2) Nitrous-oxide (N2O) from production of nitric, adipic and glyoxylic acids and glyoxal;
3) Perfluorcarbons (PFCs) from aluminium production.

Question 18

How has the EU ETS market worked since its implementation in 2005?

Answer 18

In the first two trading periods (2005-2007 and 2008-2012) the majority of allowances were given out for free and in generous amounts, so the price for first-period allowances fell to zero in 2007.
With the ETS now in its third phase (2013-2020), 40% of allowances are being auctioned and power generators have to buy all of their allowances (with exceptions in some member states like Poland, Bulgaria, Hungary, Lithuania, etc.).

Question 19

How successful was EU ETS in reducing carbon emissions since its inception?

Answer 19

In terms of total EU ETS emissions, reduction targets have been overachieved. In late Phase 2 (2008–12) and the currently running Phase 3 (2013– 20), total emissions have been consistently below the cap.

Question 20

How has EU ETS affected regulated firms?

Answer 20

The EU ETS led to a statistically significant increase in revenue and in fixed assets of regulated firms. At the same time, the EU ETS has not had any statistically significant impact on regulated firms’ number of employees and profit.