Companies have to pay more to emit CO2 in Europe. Not through new regulations, but through a system that was set up more than a decade ago.
The European emission allowance system (EU ETS) is the cornerstone of the European Union’s drive to reduce its emissions of manmade greenhouse gases which are largely responsible for warming the planet and causing climate change.
The system works by putting a limit on overall emissions from covered installations which is reduced each year. Within this limit, companies can buy and sell emission allowances as needed. This ‘cap-and-trade’ approach gives companies the flexibility they need to cut their emissions in the most cost-effective way.
After each year a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances.
For companies, this means that since 2005 there has been a financial incentive to emit less CO2. If this CO2 price rises enough, it will also become financially more interesting to invest in cleaner technologies at a given moment. However, the number of allowances, based on estimated needs, turned out to be excessive; consequently the price of first allowances fell to zero in 2007. But this year the price suddenly changed. At the start of this year 8 Euros was paid for an emission allowance. In September, that increased to 23 Euros, this is an increase of 190 percent.
How is that possible? At he end of last year, The European Union added an EU-wide cap on emissions and a progressive shift towards auctioning of allowances in place of cost-free allocation to the system. From 2021, the total amount of CO2 allowances will be reduced by 2.2 percent annually. Some market followers think that this can increase the CO2 price to 30 Euros per right.
But is this enough to meet the European climate targets? It probably requires a significantly higher price to meet those targets. According to analysts from the International Energy Agency (IEA) and the private organization Carbon Tracker, a price of 50 Euros per ton is needed to encourage companies to emit significantly less CO2 into the atmosphere.