EU ETS must be reformed to make it more resilient to crises – analysis

The European Union Emissions Trading System (EU ETS) should be reformed to make it more resilient to crises, such as the effects of Russia’s war against Ukraine or the Covid-19 pandemic, said an analysis published by the German Environment Agency (UBA). In particular, this concerns the enforcement of the obligation to surrender emission allowances, which is central to achieving the goals of the EU ETS, said the analysis by think tank Ecologic Institute.

In case of a crisis, companies might not comply with their obligation to buy and surrender emissions allowances arguing with “force majeur” or due to corporate insolvencies and plant shutdowns.

“It seems sensible to include not only a catalogue of force majeure cases, but also regulatory instruments, such as sales bans and the blocking of certificate accounts, to provide the competent authority with more options for enforcing the obligation to surrender allowances despite crises.” For example, a company affected by a crisis could be forbidden to sell allowances (for example to increase liquidity), which it would later lack when having to surrender them. Many such reforms could or would have to be implemented at member state level, said the analysis.

The EU ETS, which puts a price on climate change-inducing CO2 emissions, has been a key driver of decarbonisation in energy and industry for years, and the EU is setting up a similar scheme called ETS II for the transport and buildings sectors. Low prices for CO2 allowances mean the ETS has long been considered a toothless mechanism for climate action, but recent reforms have driven up the price, giving companies more incentives to reduce fossil fuel consumption.