Trends and projections in the EU ETS in 2016 — The EU Emissions Trading System in numbers
About this report
This 2016 report of the European Environment Agency (EEA) provides an analysis of past, present and future emissions trends under the EU Emissions Trading System (ETS), based on the latest data and information available from the European Commission (i.e. May 2016 data on verified emissions and compliance by operators under the EU ETS for the years up until 2015) and Member States (projections of EU ETS emissions until 2030, reported under the EU Monitoring Mechanism Regulation (MMR) (EU, 2013c)). The report also analyses the balance between supply of and demand for allowances in the market. The report′s annexes provide extensive material describing the functioning, scope and cap of the EU ETS.
Recent trends: the surplus of EU ETS allowances has stabilised and is now starting to decline
In 2015, the greenhouse gas (GHG) emissions covered by the EU ETS declined by 0.7 % compared with 2014. The majority of this reduction was delivered by combustion installations (mostly power plants), which account for the majority of EU ETS emissions. This reduction was achieved despite an increase in electricity demand over the same period. Emissions also decreased overall in the other types of installations, although emissions by refineries, chemical plants and the non-metallic minerals sector, as well as the aviation sector, increased.
Whereas combustion installations had to buy most of their allowances (through auctioning or in the secondary market) in 2015, the other industrial sectors received free allowances because they are deemed to be exposed to a risk of carbon leakage. Free allocation was mostly at 100 % of the corresponding benchmark value (before applying the cross-sectoral correction factor). In the case of the iron and steel, cement and lime, pulp and paper, and chemicals sectors, these free allowances were sufficient to fully cover these sectors′ emissions. The aviation sector had to meet a net demand for allowances by purchasing EU allowances (EUAs) from the stationary installations sector in order to comply with its emissions cap.
In parallel with the slight decrease in emissions, in 2015 the EU ETS saw a 17 % reduction in the supply of EUAs to be used for compliance (allowances freely allocated, auctioned or sold, as well as emission credits from international emission-reducing projects). As this decline was more pronounced than the reduction in emissions, the surplus of 2.1 billion allowances that had accumulated in the system since 2008 was cut by around 300 million in 2015. With back-loading in place, the surplus has stabilised and is now starting to decline although it remains substantial: equivalent to 1 year′s worth of EU ETS emissions. With the objective of ensuring the orderly functioning of the market and addressing the structural supply–demand imbalance, the market stability reserve (MSR) will come into operation in 2019.
Average EUA prices from auctioning platforms rose slightly in 2015, to around EUR 8 per tonne CO2-eq. At current levels, the price signal of the EU ETS provides limited incentive for the more expensive abatement options necessary to decarbonise the European economy in the long term.
Long-term trends: emission reductions in power generation have been driving the emission decreases observed in the EU ETS since 2005
Stationary EU ETS emissions decreased by 24 % between 2005 and 2015 and, in 2014, fell below the cap set for 2020 (1). The decrease was mostly driven by emission reductions in power generation, although electricity generation declined only slightly over the same period. The reduction in emissions was largely the result of changes in the mix of fuels used to produce heat and electricity, in particular less use of hard coal and lignite fuels and a jump in the use of renewables, which almost doubled over the period.
The trend at the EU level does not fully reflect the quite different situations observed at the Member State level. For example, in Poland, electricity generation still largely relies on the use of solid fossil fuels, and there is a risk that longer term emissions will be ′locked in′ because other sources of electricity generation are limited and because the fossil power supply infrastructure is still relatively young. In contrast, in the United Kingdom, power generation from coal is currently being phased out.
Emissions from the other industrial activities covered by the EU ETS have also decreased since 2005, but remained stable in the last 3 years of the current trading period (2013–2015).
Figure ES.1 Emissions, allowances, surplus and prices in the EU ETS, 2005–2015
EU allowances, necessary for compliance under the EU ETS, can be allocated to operators in several ways. Auctioning is the default method of allocating allowances within the EU ETS, especially for the power sector. The proportion of allowances to be auctioned is expected to increase every year over the period 2013–2020, which means that firms have to purchase an increasing number of allowances (via auctions/primary market sales or in the secondary market). As a consequence of the back-loading decision, the volumes of allowances auctioned in 2014 and 2015 were significantly lower than in 2013.
In order to ensure equal treatment of new industrial installations, a reserve of 480 million EUAs (the New Entrants′ Reserve, or NER) was set aside at the start of the third trading period for new installations or to accommodate increases in the capacity of existing installations (2). Between 2013 and 2015, most allowances from the NER were allocated to support capacity extensions. Overall, the set-aside allowances are used to a relatively limited extent in comparison with the overall envelope of the reserve. After 3 years of the current 8-year trading period, only 20 % of the allowances in the NER have been used or reserved for future use. Use in the coming years is subject to uncertainty, as it will depend to a large extent on future economic developments.
In eight Member States, some installations in the electricity generation sector (which would normally have to buy their allowances) receive a transitional free allocation under Article 10c of the ETS Directive, so that the value of these allowances is invested in efforts to modernise electricity generation. Just under half of the maximum budget (i.e. 49 %) for Article 10c allowances was used between 2013 and 2015. There are insufficient data to evaluate directly the performance of completed investments; however, the available sources suggest that there is no basis on which to establish the extent to which such investments have contributed to diversifying the energy mix. Furthermore, a large part of the investments generated by transitional free allocation seems to be used to modernise existing fossil fuel capacity (e.g. extending the lifetime of fossil-fuel based electricity generation units).
To comply with their legal obligation, operators liable under the EU ETS are also allowed to use a limited number of credits generated by emission-reducing projects. By the end of 2015, almost the entire quantity of emission credits allowed for the whole trading period had been used up, with only 4 % of entitlements remaining (3). Qualitative restrictions for project types have been tightened over the years; 2015 was the first year that emission reduction generated in the first Kyoto period (2008–2012) could no longer be used for compliance.
Projections: Member States project a significant slowdown of GHG reductions in the EU ETS. New policies are being developed to achieve the EU′s 2030 climate and energy targets.
According to the projections reported by EU Member States in 2015 under EU legislation, EU ETS emissions will continue to decrease with the current policies and measures in place, by a total of 7 % between 2015 and 2020, and by a further 5 % between 2020 and 2030. This would result in an overall 12 % decrease between 2015 and 2030. The projected average annual decrease in EU ETS emissions between 2015 and 2030 is much less than the average annual decrease in EU ETS emissions achieved between 2005 and 2014. As many as 13 EU Member States project increasing EU ETS emissions between 2015 and 2030. These national projections differ from the reference scenario used by the European Commission in its proposal for a 2030 framework for climate and energy policies, which assumes that EU ETS emissions between 2015 and 2030 will decrease in all Member States except for Latvia, Luxembourg, Malta and Slovenia.
In October 2014, European leaders endorsed a binding EU target of a domestic reduction in GHG emissions of at least 40 % by 2030 compared with 1990, with a contribution from the EU ETS amounting to a 43 % reduction compared with 2005. This reduction should be achieved by increasing the annual reduction in the cap from 1.74 % (third trading period) to 2.2 % from 2021 onwards, as proposed by the European Commission. Taking this additional factor into account, and using the projections available from Member States, the EU ETS surplus could be absorbed by the MSR in 2029, but the projected reductions would not be sufficient to achieve the 43 % reduction below 2005 levels expected from the EU ETS.
The updated projections that Member States will submit in 2017 are expected to better reflect the new policy framework for 2030 and current policy proposals being discussed at EU level, as well as the dynamic effects of the MSR.
Figure ES.2 Supply and demand balance for stationary installations, 2005–2015