New CAKE analysis: EU ETS synergies

New CAKE analysis: EU ETS synergies

New CAKE analysis: EU ETS synergies

We are pleased to present the latest CAKE/KOBiZE analysis „VIIEW on EU ETS 2050: Exploring synergies between the EU ETS and other EU climate policy measures – carbon removal, hydrogen, and sectoral transport policy”.

  VIIEW on EU ETS 2050: Exploring synergies between the EU ETS and other EU climate policy measures - carbon removal, hydrogen, and sectoral transport policy (3.3 MiB, 307 hits)

  Summary & Policy Recommendations (1.1 MiB, 199 hits)

The EU is currently aiming for a 55% reduction in domestic greenhouse gas emissions by 2030 and net zero emissions by 2050. These targets, set in December 2020 and 2019 respectively, are enshrined in the EU climate legislation. The ‘Fit for 55’ legislative package, part of the European Green Deal, includes measures such as the EU ETS Directive and the Effort Sharing Regulation (ESR) to achieve these targets. Other initiatives focus on specific sectors and gases. However, according to the EC’s in recent years, the progress made by Member States has been substantially below what is necessary to achieve the EU’s medium and long-term climate goals in the coming decades. The European Commission’s new proposal for a 2040 climate target, published in February 2024, is based on the European Climate Law. The EU agreed to set “an EU-wide climate target for 2040” on the basis of a Commission proposal to be presented by June 2024 at the latest. Looking beyond 2030, detailed guidance is needed to effectively steer the EU towards climate neutrality and to avoid decisions that could lock in high emissions and high costs. Long-term strategies are crucial given the lead time needed for investments in energy infrastructure and industry.

New elements in the political debate on the future of EU climate and energy policy, such as carbon dioxide removal (CDR) and green hydrogen, transport policy and the inclusion of some sectors in the EU ETS, will be the most important elements in the emission reduction pathways for 2050. The decision-making process would have a significant impact and consequence on the whole EU economy and development strategies.

The main goal of this analysis is the identification of current and potential future instruments which could affect the functioning of the EU ETS and non-ETS sectors post 2030. We are focusing on the following key areas:

• role and use of Carbon Dioxide Removal (CDR),
• green hydrogen subsidies,
• additional measures to decarbonise transport.

In this analysis we examine the impact of above elements on the:

• CO2 prices in the EU ETS, ETS2 and the rest of non-ETS,
• macroeconomic outcomes (GDP and consumption),
• sectoral indicators (e.g. agricultural production, energy mix, transport emissions).

Here are expanded and detailed policy recommendations:

Revised Targets: Given the discrepancies between current projections and the European Commission’s ambitious targets for 2040, a comprehensive reevaluation is necessary. This reassessment should consider the maturity and scalability of emerging technologies like e-fuels and direct air capture and storage (DACCS). It should also factor in the realistic rates of technology adoption and diffusion. In this context, to ensure economically acceptable realization of climate policy, the following actions may be necessary:

• Integration of international emission offsets as per Article 6 of the Paris Agreement to enhance flexibility.
• Increased emphasis on carbon removal technologies such as BECCS and extensive afforestation efforts.
• Linking the EU ETS with other regional trading systems to enhance market liquidity and cost-effectiveness, ensuring that stringent emissions caps do not lead to economic dislocation and carbon leakage.

Enhanced Support for Carbon Removal Technologies: There is a critical need to integrate carbon removal technologies more effectively into the EU’s climate strategy, especially in sectors where emission reductions are challenging. A strategic plan should be developed to:

• Prioritize and price carbon removals accurately to reflect their true value in achieving net-zero goals.
• Implement financial and regulatory incentives to scale up technologies like BECCS and to increase afforestation, particularly in regions like Poland where the potential for forest growth is significant.
• Support research and development in innovative carbon sequestration methods to broaden the scope of viable technologies.

Implementation of ETS for Other Sectors: The expansion of the ETS to include sectors currently exempt, such as certain agricultural and waste operations, requires a strategic approach:

• Develop sector-specific adjustments to ensure that new entrants to the market can integrate without undue economic burden.
• Consider the socio-economic impacts on regions like Poland, where the implications of ETS expansion could be significant, ensuring that transitions are manageable and supported by adequate policies.

Establishment of a European Carbon Central Bank (ECCB): To ensure coherent market operations and to manage risks effectively, the establishment of an ECCB is recommended. This institution would:

• Regulate the allocation and pricing of EU allowances and carbon removal units.
• Monitor market activities to prevent volatility and ensure stability.
• Coordinate with national and regional authorities to align broader economic policies with carbon market dynamics.

Support for Green Hydrogen Production: As the EU looks to reduce its carbon footprint, supporting green hydrogen production is essential, particularly through:

• Subsidies and policy support during the critical deployment phase from 2030 to 2035.
• Assessment of impacts on GDP and consumption to ensure that support mechanisms do not distort broader economic stability.
• Development of infrastructure and market frameworks to facilitate the integration of hydrogen in the energy mix.

Balanced Subsidies and Emission Standards in Transport: Achieving emission reductions in the transport sector requires a balanced approach:

• Implement a mix of subsidies and strict emission standards, tailored to the needs of different transport modalities (passenger vs. freight).
• Ensure that policies are adaptive and capable of evolving with technological advancements and market conditions.

Careful Design of GHG Removal Subsidies in Agriculture: Given the unique challenges in agriculture, subsidies designed for GHG removal must:

• Be carefully calibrated to support sustainable practices without imposing undue financial burdens.
• Consider the specific needs and capabilities of different agricultural regions within the EU.

Market Stabilization Measures for Agriculture: To support the transition to carbon neutrality in agriculture:

• Implement policies that stabilize markets and protect farmers from severe economic impacts.
• Explore innovative market mechanisms that can buffer against price spikes and production declines.

Comprehensive Dialogue and Stakeholder Engagement: To ensure that the transition to a sustainable economy is both equitable and effective:

• Engage a broad range of stakeholders in the policy design process, particularly in sectors like agriculture.
• Foster ongoing dialogue to ensure that policies remain relevant and effective, adjusting as necessary to meet both environmental goals and economic realities.