The European Commission has adopted a Carbon Market Report with an analysis of the performance of the European Union Emissions Trading System (EU ETS) in 2022 and the first six months of this year. Emissions from the energy and industry sectors have been reduced by 37.3% from the 2005 levels.
The purpose of the EU ETS is to limit greenhouse gas emissions. Through the mechanism, prices are determined for emitters from the energy sector, industry, and aviation.
They are responsible for 36% of all emissions in the EU. One purchased permit, an emission unit, allows the release of one ton of carbon dioxide equivalent. The number of permits is reduced yearly to meet the EU’s climate goals.
The EU ETS helped reduce emissions from the energy and industry sectors by 37.3% from the 2005 levels, the European Commission said in the report. The pandemic and, after it, the energy crisis temporarily slowed down efforts to reduce emissions.
In the aviation sector, emissions began to rise after a drastic decline in 2020
Emissions from electricity generation and heavy industry only saw a slight reduction in 2022 due to increased coal usage for electricity and heat production aimed at ensuring energy supply security. Other factors included a spike in natural gas prices and a weakening of the industrial output due to rising energy costs. In the aviation sector, emissions increased again after a massive decline in 2020 due to the pandemic.
Despite temporary disruptions, the EU ETS operated efficiently last year, according to the European Commission. Emissions from power plants and heavy industry remained 7% below the pre-pandemic 2019 level. Permit auctions proceeded as planned. A brief decline was only observed at the start of the Russian invasion of Ukraine. Nearly EUR 39 billion in auction revenue was collected, bringing the total EU ETS revenue to EUR 152 billion.
Auction revenues are used for climate action
Member states directed, on average, 76% of their 2022 EU ETS revenues towards climate action and energy transition, including measures to address the energy crisis and support citizens and businesses.
In addition, the Modernization Fund contributed to improving the energy sector in all member states that utilized it. The Innovation Fund allocated EUR 2 billion to new energy and industry transformation projects. Both mechanisms are financed through permit sales.
Other components of the EU ETS also functioned properly in 2022, as shown in the report. The Market Stability Reserve (MSR) continued to remove surplus permits from auctions, and in 2023 it began to invalidate allowances. “Market oversight rules ensure that the EU carbon market functions smoothly and the framework for monitoring, reporting, and verification of emissions guarantees environmental credibility of the EU ETS,” the European Commission said.
The EU ETS will be extended to the maritime sector, road transport, construction, and low-emission industry
The emissions trading system will expand to the maritime sector next year. The EU has decided to introduce ETS 2 in 2027, covering buildings, road transport, and small-emitting industry.
With the planned expansion, carbon pricing will cover three quarters of all emissions. The EU ETS emission reduction goal for 2030, from the level measured in 2005, was lifted this year to 62% from 43%.