The EU ETS is considered a successful and resilient tool for reducing emissions, backed by political commitment and sophisticated mechanisms, and is being promoted as a global model for carbon pricing and green finance. Politicians see the EU ETS as a crucial economic instrument driving climate action and long-term sustainable investment.
“We have just started the carbon markets works - the system is improving and has proven its resilience as it has absorbed a lot of exogenous shocks. The EU ETS is a success story.” - Julien Viau from the French Ministry of Finance at the 2024 State of the EU ETS report launch event in Brussels in May.
At the event, representatives of the political world highlighted their support for the EU cap-and-trade. The system is resilient and is here to stay. It has proved that it can absorb economic shocks and that it is successful in significantly reducing emissions - there was a record 15.5% decrease in CO2 emissions in 2023. Politicians praised the system's sophisticated mechanisms like its robust revenue redistribution to member states for example. They recalled their long-term commitment - as the system has gotten increasingly sophisticated, politicians aim to export this model globally through initiatives like the Carbon Border Adjustment Mechanism (CBAM) and the EU Global Task Force, promoting international decarbonization efforts and refined climate policies.
At the 2024 State of the EU ETS report launch event in Brussels in May, a representative from a national government (Julien Viau from the French Ministry) and a representative from the EU Commission both unequivocally affirmed that the EU ETS is effective and here to stay. “We have just started the carbon markets works - the system is improving and has proven its resilience as it has absorbed a lot of exogenous shocks. The EU ETS is a success story.” said Viau.
Both government representatives at the event highlighted the record reduction in 2023 ETS emissions, announcing a 15.5% decrease in CO2 by EU installations covered by the scheme. They emphasized that the mechanism is sophisticated, with robust redistribution mechanisms bringing important revenues to member states.
According to Julien Viau, the EU ETS is here for the long term as it takes time for individual member states to incorporate all the reforms and new texts into their national legislation. This is a positive sign, indicating that political entities are committed over the long run, and the scheme is continually improved to best reflect the socio-economic reality.
Another important quote from the event was, "We have just started the carbon markets' work—the system is improving and has proven its resilience as it has absorbed a lot of exogenous shocks." Indeed, the system has had its challenging periods in the past. For example, during the financial crisis, there was a structural oversupply, and carbon prices fell below 5 EUR. More recently, the market became very myopic, and EUA prices dropped as regulators temporarily introduced more volumes. However, historically and even now, the EU ETS has demonstrated its ability to recover and remain robust.
Michael Pahle from the PIK Potsdam Institute began his remarks by stating, "In 2023, the finance minister of every country should have realized how important the EU ETS is." Indeed, with numerous stakeholders involved and many large scale EU green projects dependent on it, the EU ETS has evolved far beyond a simple climate policy tool; it is now a sophisticated economic instrument.
Julien Viau emphasized that the Carbon Border Adjustment Mechanism (CBAM) sends a robust signal for international decarbonization efforts. As a refresher, the CBAM is a policy tool that requires importers to compensate for the carbon intensity of their products. Introduced in 2023, it will progressively encompass a greater portion of CO2 emissions associated with EU imports.
The EU Commission representative affirmed, "The EU Global Task Force will assist other countries in refining their climate policies and draw insights from our experiences." They believe that the lessons gleaned from the functioning of the EU ETS are invaluable and warrant consideration as a model for the global implementation of carbon pricing initiatives.
In a previous edition of our newsletter, we explored how carbon prices, and the EU Emissions Trading System (EU ETS) especially, are a proxy for political commitment to combating climate change. For instance, the proposal of the European Green Deal showed politicians' dedication to stronger climate policies, which led to a positive reaction in EUA prices. Similarly, a few months later, the introduction of the Fit for 55 package also triggered a positive response in EUA prices.
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