The EU Emissions Trading System in 2019: trends and projections

This briefing is based on data and information available as of June 2019: verified emissions and compliance by operators under the EU ETS for the years up until 2018, extracted from the EU Transaction Log of the European Commission and projections of national ETS emissions until 2030, reported by EU Member States, Iceland and Norway to the European Environment Agency.

A more detailed analysis is available in the report ‘Trends and projections: the EU Emissions Trading System in numbers in 2019’, prepared by the European Topic Centre on Climate change Mitigation and Energy (ETC/CME).

Emissions

Historic trends

Total ETS emissions from stationary installations declined by 4.1 % between 2017 and 2018. Over a longer period, total ETS emissions from stationary installations have declined by around 29 % between 2005 and 2018 (Figure 1).

Combustion installations (mainly power plants)^[1] remain the main source of emissions in the EU ETS (65 % of total ETS emissions in 2018). This is also the sector where the main emission reductions have taken place (5.9 % reduction in 2018 compared to the previous year). This decline partly reflects the phasing out of coal use in several Member States. In 2018, the 30 highest emitting power plants alone emitted 329.2 Mt CO₂, 30 % of the total EU combustion emissions in that year. The top emitting power plants are located mainly in Poland and Germany, and burn lignite fuel.

The ETS emissions of other industrial installations decreased by an average of 0.7 % in 2018 compared with 2017^[2]. This annual change in industrial ETS emissions, however, varied by industrial sector, reflecting changes in production output, rates of energy efficiency and the extent to which biomass, including waste from biological origin, were used as energy sources in production processes.

The ETS emissions from the aviation sector continued to increase year on year throughout the third trading period^[3], and in 2018 were 4.0 % higher than in the previous year. This primarily reflects the increasing demand for air travel.

Figure 1 - EU ETS emissions by activity type

Source: EEA (2019a).

Projected trends

While total stationary ETS emissions decreased by 29 % between 2005 and 2018^[4], the rate of reduction is projected to slow, according to national projections reported by Member States, Iceland and Norway in 2019 under EU legislation. ETS stationary emissions are projected to decline by 7 % between 2018 and 2030, with existing measures in place. This means a decrease of 36 % in 2030 compared to 2005. With additional measures, emissions are projected to be reduced by an additional 5 %. So even with additional measures, emission reductions will amount to approximately 41 %, slightly less than the 43 % reduction target.

Emissions are expected to decline in 20 countries between 2018 and 2030 with existing measures, with the highest relative reductions of 40 % forecast in Estonia (Figure 2). However, ten countries still anticipate increases in their ETS emissions between 2018 and 2030 with existing measures. The reasons for these increases include:

• the planned phase out of nuclear energy, to be replaced by new fossil production plants (e.g. Belgium);
• the increase in carbon intensive energy production (e.g. Ireland, Denmark, Malta);
• the increase in emissions from industrial processes (e.g. Ireland, Lithuania, Poland, Romania).

Some of these countries are planning to adopt and implement additional measures to reduce emissions. Additional policies and measures offering greater reductions are:

• the growth and more widespread use of renewable energies (e.g. Ireland);
• the phase out of coal-fired power plants (e.g. France, Spain);
• the phase out of direct oil shale combustion and the increase in the efficiency of oil shale combustion plants for electricity generation (Estonia);
• the increase in biomass co-firing (e.g. Ireland).

Figure 2 - Historic and projected changes in ETS emissions relative to 2005 levels

Balance of allowances

According to the European Commission (EC, 2019), the total number of allowances in circulation (TNAC) amounted to 1.65 billion in 2018. The overall supply of allowances in the EU ETS in 2018 remained lower than the overall annual demand, if the net demand for allowances from the aviation sector is also taken into account. This was due, in part, to fewer allowances being allocated for free (reflecting the planned annual reduction in the ETS cap) and the limited use of international offsets that installations can use for compliance. Furthermore, fewer allowances were auctioned in 2018 than in 2017. This is partly due to the fact that Germany sold fewer allowances via auctions than expected.

Despite the lower number, revenues from the auctioning of EU allowances increased from EUR 5.5 billion in 2017 to EUR 14.1 billion in 2018, reflecting the increase in the allowance price (i.e. the average allowance price increased from EUR 5.8 per tonne in 2017 to EUR 15.5 per tonne in 2018)^[5].

To ensure the orderly functioning of the market and address the structural supply-demand imbalance, the Market Stability Reserve (MSR) began operations in January 2019. The MSR places a proportion of the total allowances (holdings) of the market into a reserve when the number of allowances is exceeding the demand above a certain threshold. In May 2019, the European Commission announced that a total of 397 178 358 allowances will be placed in the MSR between 1 September 2019 and 31 August 2020 (EC, 2019).

The EEA prepares estimates based on national projections of ETS emissions reported by Member States. According to these EEA estimates, the TNAC will decrease, as a consequence of allowances moving into the reserve over the coming years (Figure 3). From 2023 onwards, certain holdings in the reserve will lose their validity^[6]. As EU ETS emissions are projected^[7] to be higher than the cap from 2026 onwards, the demand for allowances will contribute to further reducing the TNAC. With measures currently in place, the EEA also estimates that the TNAC might not fall below the lower MSR threshold of 400 million before 2030.

Figure 3 - EEA outlook of the supply and demand of allowances until 2030

Notes: For the period from 2019 to 2030, the TNAC is an estimate based on Member States projections. New units entering the market include free allocation, allowances auctioned and sold, and the use of international credits.

Sources: Authors’ calculation based on the projections of EU Member States, Iceland and Norway, which were compiled by the ETC/CME and the EEA (2019b). Download the figure here.