What is the Target of the EU Emissions Trading System?

In the European Union, ETS was made in order to ensure that a drastic cut on the emission of greenhouse gas (GHG) is achieved in a cost effective and market measurable manner in compliance with the overall greenhouse gas emission reduction made by the European Union.In 2005, EU ETS was designed and it should allow the decarbonisation of the European economy in a bid to attain climate neutrality by the year 2050 and its intercessions which are a reduction in net emissions by 55 percent in the year 2030 compared to the levels 

What is the EU Emissions Trading System (EU ETS)

EU ETS is the recently developed form of cap and trade compliance, in which large emitters of greenhouse gasses must have permits that are equal to the amount of gas they produce.

 It addresses major industries like those sported by;

• Electricity and heat generation,
• Industrial manufacturing,
• Aviation,
• Maritime transport (since 2024).

The system is extended to all EU member states in addition to Iceland, Liechtenstein, and Norway that are connected with the Switzerland carbon market.

In this plan, the EU gives a yearly ceiling on the overall emissions that reduces gradually with time prompting companies to lower the size of their carbon footprint. Companies who need to satisfy their obligation can purchase, trade, or sell emission permits—the financial incentive to reduce emission.

The Climate Targets of the EU ETS

The aim towards achieving Climate Neutrality in the Year 2050

The ultimate objective of the EU ETS would be that the EU is in position to fulfill climate-neutrality in 2050, i.e. it should become net-zero of greenhouse gas emissions. That is quite an ambitious target that can align with the European Green Deal and the European Climate Law that will see Europe transform into a low-carbon economy, in a sustainable way.

The 2030 Emissions Reduction Target

The EU is trying to decrease its net emissions by at least 55 per cent in 2030 relative to that of 1990 as an interim measure. This target will be legally binding against the European climate law and further supported by changes to the policies of EU ETS.

This higher ambition was implemented in the ETS Directive in 2023, where the cap was tightened further, so that emissions are cut by 62 percent in 2030 compared to 2005. This ought to be accompanied by a broader scope to maritime emissions as well as a reduction of free allowances to companies unless the company can show progress towards significant decarbonization.

How Does the EU ETS Help Achieve These Targets?

Reducing the Cap of Emission Allowances

The amount of cost-free allowances issued reduces after every year making the allowances scarce and placing pressure on allowance prices. This is a market signal that allows industries to innovate in a bid to cut on emissions.

Trading and Flexibility

Power to trade allowances among companies helps them to strike the right balance between economics and the environment. The institutions that decrease emissions more quickly are able to sell the redundant allowances whilst those who are struggling to reduce are able to acquire allowances to cover their emissions as they shift.

Monitoring and Compliance

Companies will need to flag and report their emission on a regular basis and trade the corresponding allowances. If it is not followed properly, severe fines are imposed, which underlines integrity.

Recent and Ongoing Reforms

The EU ETS has become more effective through several legislative reforms and package of policies:

• The package, named Fit 55, (to be adopted by mid-2023) has provisions to increase ambition, strengthen the Market Stability Reserve and carbon pricing in new sectors.
• Eliminating free allowances by 2026 in the aviation industry in order to encourage reduction of emission.
• A new system, ETS2, applying to buildings emissions, road transport, and small industries will be introduced in 2027.
• Establishing the Social Climate Fund to cushion social effects of carbon pricing in the sectors of ETS2, making available more than €86 billion between 2026 and 2032.

EU ETS and Member States

There are 27 EU member states as well as Iceland, Liechtenstein and Norway in the EU ETS. Upon the work of the countries, this endeavors in ensuring that the system is successfully working and ensuring that the collected revenues-more than 175 billion since 2013- are channeled back to funds that promote green technologies, renewable energy, and innovation.

Another important tool that is associated with EU ETS is the Carbon Border Adjustment Mechanism (CBAM). It levies tariffs on imports in nations that have less restriction when it comes to climate policies, which is used to save EU industries and influence global emissions reductions.

Its ambitious, legally binding objectives to transform Europe into climate-neutrality by 2050 with a considerable reduction of the emissions by 2030. Market plus regulatory regulations in the EU ETS has been a remarkable attempt at providing an effective and efficient way of curbing greenhouse gases and introducing efficiency in economic transformation.