The European Union’s cap-and-trade system has long been considered the gold standard for market-based emissions-reduction policies, and it’s influenced similar efforts from California to South Korea. Since 2005, it’s helped reduce the EU’s industrial carbon emissions by about 50 percent, and a recent working paper called it the “most impactful climate policy in the world.” But a set of changes proposed earlier this month by the European Commission, the bloc’s legislative body, has called its credentials into question.
Wijnand Stoefs, EU policy lead for the European nonprofit Carbon Market Watch, likened the day of the proposals to Black Friday — and he wasn’t talking about the annual shopping event. Instead, he reached for another metaphor. “Smoke appeared from the 13th floor of the Berlaymont,” he wrote on LinkedIn, referring to the Brussels headquarters of the European Commission. “And it was acrid, tarry, black smoke.”
Stoefs’ account is unusually evocative, but he shares concerns with other policy experts who say the commission’s proposed updates — including slower emissions reductions and extra leniency for major polluters — will weaken the EU’s Emissions Trading System, or ETS, while potentially emboldening industry groups that want to weaken cap-and-trade systems elsewhere.
“I think they will have the perfect excuse to go, ‘Hey, the EU isn’t moving ahead as fast as they were,’” Stoefs told Grist. “It’s just, like, a belt of ammunition for industrial lobbyists.”
The ETS is the European Union’s flagship climate policy. It sets a cap on carbon emissions for about 10,000 EU oil refineries, power stations, and other companies that together represent 40 percent of the bloc’s total climate pollution. It works by requiring certain companies to buy “allowances” to cover their expected emissions for the year — and each year, the amount of available allowances shrinks, forcing companies to gradually reduce emissions. Sometimes a polluting company purchases more allowances than they’ll actually need, in which case they can sell their surplus to other firms. Companies that reach the end of the year without enough allowances, however, are subject to heavy fines.
Until earlier this month, the ETS was on track to steer the companies it covers to net-zero by 2039. The most significant update proposed by the European Commission would delay that timeline. Instead of reducing total emissions by 4.4 percent a year until 2039, the commission proposed to lower emissions by 3.7 percent annually between 2031 and 2035, and then just 1.7 percent thereafter.
In explaining the move, the European Commission said it would “bring relief to industry” while still lining up with EU climate law requiring member states to reduce economy-wide emissions by 90 percent below 1990 levels by 2040.
Sven Harmeling, head of climate at the nonprofit Climate Action Network Europe, disputed this claim, saying the bigger issue is all of the extra carbon that may now be released into the atmosphere over the next 14 years. “There are different ways you can get to 2040 with more or less emissions,” he told Grist, and a slower decarbonization timeline has the potential to allow much more pollution than a faster one. Carbon emissions warm up the planet and contribute to more frequent and intense extreme weather, including heat waves, wildfires, and storms.
According to one estimate, the European Commission’s new proposal would allow covered companies to emit roughly 2 billion metric tons more carbon pollution than the previous plan. That’s significant, given scientists’ projection that, as of 2025, the world can only emit another 80 billion metric tons of carbon pollution and still have a two-thirds chance of limiting global warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit) — a threshold beyond which risks to ecosystems and society escalate dramatically.
The ETS “only looks at where we’re going to be in 2040,” Harmeling said. “What happens between 2030 and 2040 is actually what matters to the climate.”
The commission also proposed continuing to dole out free emissions allowances to certain companies, including those it thinks might otherwise relocate in order to avoid paying for their climate pollution. Critics said this could not only disincentivize faster decarbonization; it could enrich big polluters. ETS-covered companies have regularly received more free allowances than they actually need, allowing them to sell and earn billions of euros from them.
Some of those companies, including the steelmaker ArcelorMittal and chemical company BASF, lobbied heavily for the ETS to distribute more free allowances.
To be sure, the details of the European Commission’s proposal may still change; they’re now subject to negotiation with the Council of the EU and European Parliament, and some European environment ministers have vowed to “fight tooth and nail” against a weakened ETS. The final rules are expected by early next year.
Milan Elkerbout, director of an international climate policy initiative at the think tank Resources for the Future, was less grave in his evaluation of the commission’s proposal. Yes, slower emissions cuts for ETS-covered sectors will require faster decarbonization elsewhere — like in agriculture and construction — but he thinks that’s still possible, keeping the EU’s 2040 target within reach.
The ETS remains, “by quite a margin, the most ambitious [carbon] trading system in the world,” he added. He said carbon trading mechanisms in California, Washington state, Quebec, South Korea, and elsewhere are different enough to be insulated from direct copy-and-paste modifications — and that, in fact, aligning them more closely with the ETS could raise their ambition rather than lower it.
Still, despite structural differences among regional carbon trading systems, polluters everywhere tend to share similar goals: cheaper emissions allowances, more free pollution permits, laxer rules on carbon credits — all of which serve to drive down the price of carbon. Big polluters in the oil and gas industry are already pushing for these reforms in places including California, which in May said it would expand free emissions allowances to oil refineries.
Stoefs said it’s hard to see how the European Commission’s recent retrenchment won’t be used to justify — or at least advocate for — similar concessions elsewhere. “If the EU waters down the ETS, I think those other systems will do the same,” he said.
