The proven efficacy of the EU ETS, as well as the incentive brought up by the CBAM are prompting more and more legislatures to adopt greenhouse gas emissions trading schemes across the world.
The European Union's Greenhouse Gas Emission Trading Scheme (or EU emissions trading scheme EU ETS), introduced in 2005, has demonstrated significant success, with emissions from covered sectors decreasing by approximately 40%. In 2023, an important reform introduced was the Carbon Border Adjustment Mechanism (CBAM) - the primary goal is to assure that the European economy is not hurt by the imposed CO2 emissions trading cost. The introduced mechanism works by imposing carbon costs on certain imported goods based on the amount of carbon emissions embedded in their production.
The proven efficacy of the EU ETS, as well as the incentive brought up by the CBAM are prompting more and more legislatures to adopt greenhouse gas emissions trading schemes across the world.
A greenhouse gas emissions trading scheme is a market-based approach used to control pollution by providing economic incentives for reducing the volumes of CO2 released. Under such a scheme, a regulatory authority sets a limit or cap on the amount of greenhouse gasses that can be emitted by covered entities. These entities are then able to buy and sell emission allowances, encouraging them to find cost-effective ways to reduce their emissions and potentially profit from doing so.
Greenhouse gas emissions trading schemes are a policy tool engineered by regulators, relying on government commitment to combat climate change. Europe, historically dedicated to demonstrating its climate change mitigation efforts, was the first region to establish a carbon market of its own in 2005. This GHG trading scheme has become increasingly sophisticated over time, reflecting Europe's ongoing dedication to lead the global decarbonization effort.
Back in 1992, the United Nations Framework Convention on Climate Change (UNFCCC) aimed at establishing concrete steps to limit global warming caused by human activity. This led to the Kyoto Protocol in 1997 that introduced some key principles later on becoming the core values for the EU ETS - it included absolute emission targets for industrialized nations, and has set the stage for international emissions trading.
The EU GHG trading scheme has undergone several phases of evolution - the initial years had to “set the rules of the game” and make sure that the GHG trading compliance and deadlines are understood by all industrial and power installations. Currently in its fourth phase (2021 to 2030), the carbon trading scheme keeps undergoing reforms and adjustments, becoming more and more sophisticated over time. It currently serves as an example to other economies in the phase of establishing emissions trading schemes of their own, as discussed below.
As the EU ETS evolved through its various phases, other GHG emissions trading schemes emerged globally. Currently, there are 39 jurisdictions either having implemented or in the process of establishing a carbon trading scheme, collectively covering 23% of the worldwide greenhouse gas emissions (11.66 GtCO2e,). The World Bank has created a global Carbon Pricing Dashboard, keeping track of the emergence of regional, national and subnational carbon pricing initiatives.
In recent years, both the trading volumes of the European GHG emissions trading scheme and the global carbon markets have experienced notable increases. In 2023, the total value of global carbon markets has surged to $949 billion, with the EU ETS representing a 87% share.
In 2023, the EU introduced the Carbon Border Adjustment Mechanism (CBAM). It aims to address carbon leakage - when efforts to reduce carbon emissions in one region lead to an increase in emissions in another region due to the relocation of industries to areas with less stringent regulations. It does so by imposing carbon costs on certain imported goods based on their embedded carbon emissions (the ones generated for their production). The CBAM is here to make sure that the EU ambitious climate targets are not undermined by disparities in the pricing of domestic and imported products.
The introduction of the CBAM imposes a financial burden on countries lacking their own carbon pricing schemes, it is an incentive for them to adopt carbon markets of their own. According to European Parliament representative Mohammed Chahim, the CBAM is primarily a signal rather than a revenue generator for the bloc, mentioning that the funds raised won't be enough to mitigate Europe's climate emergency. Instead, it underscores two key messages: firstly, Europe's leadership in global climate policies, and secondly, the imperative for every other country to establish their own carbon trading mechanisms.
Currently other significant carbon markets across the world are
New Emissions Trading Systems (ETS) continue to emerge globally.
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