The article takes an in-depth look at how the EU Emissions Trading System (ETS) works and how it has developed since 2005, when it was established. The system covers industries with high levels of greenhouse gas emissions, such as cement, steel and aluminium factories, and power plants.
These companies, which account for roughly 40 per cent of total carbon emissions in Europe, receive a certain, yearly allowance of emission rights, which can also be bought and sold on an exchange. The total allowance decreases every year, creating an economic incentive to reduce emissions and promote low-carbon technologies.
In the initial years of the system, the price of emission rights remained low for various reasons at the same time that a surplus emission rights arose. The price lingered at an average of EUR 9.3 per tonne during the period 2009–2019, which made it a lost decade regarding the system’s ability to contribute to the climate transition.
The Market Stability Reserve was therefore created in 2019, entailing that if the surplus rises to a certain level, a portion of the surplus would be subtracted from the market and placed in a reserve. In the event this reserve becomes larger than one year’s use, the emission rights will be permanently removed from the market.
In that same year the European Commission adopted the European Green Deal, with the ambition that the EU would be carbon neutral by 2050 and including an intermediate goal of cutting emissions by 55 per cent by 2030 compared to 1990.
Since then, prices of emission rights have also begun rising, and the system is thereby working as conceived. In 2021 the price of emission rights rose from EUR 30 to EUR 80/tonne, an increase of more than 165 per cent. Thus price is beginning to seriously become a factor to take into account for the industries and power utilities that are included in the system, according to SEB’s experts.
As SEB writes in the Investment Outlook: “2022 will be the first year when the price level begins to work as the ‘invisible hand’ of the carbon dioxide market and have a significant impact on emissions. Within the EU, the price of emission rights affects all major industrial activities, as well as the energy sector.”
SEB’s assessment is that the price of emission rights will average around EUR 100/tonne during 2022 and 2023.