BlogEmissions Trading System (ETS)

EU climate targets need further policies

Written by

Ulf Narloch

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Latest projections show that the EU will fall short of reaching its 2030 target to reduce emissions by 55% based on 1990 levels. Significant cuts have been achieved in the past decades – especially in energy and industry. Yet, in addition to currently planned policies, new measures will be needed to reach these climate targets.

Ambitious reduction targets for 2030

In the European Green Deal, the EU set an ambitious goal to reach carbon neutrality by 2050. These goals were codified in the European Climate Law (ECL) in 2021.

Towards this long-term goal, the EU’s climate and energy framework specifies three targets for 2030, underpinned by a set of policy measures in the EU’s Fit-for-55 package:

  1. Reduce total greenhouse gas (GHG) emissions by 55% compared to 1990 levels
  2. Increase the share of renewable energy to at least 42.5% as per the revised Renewable Energy Directive (RED)
  3. Improve energy efficiency by cutting final energy consumption by 11.7% compared to a 2020 reference scenario as per the revised Energy Efficiency Directive (EED)

To reach the emission reduction targets, the EU follows a governance framework consisting of 3 pillars, each covering different sectors of the economy.

Emissions Trading System (ETS)

A  market for emission allowances for energy, energy-intense industry, aviation and shipping covers approx. 40% of EU emissions.

The EU’s Fit-for-55 package also involves a reform of the EU ETS (amendment 2023/959) to reduce emissions by 62% in the covered ETS sectors until 2030 compared to 2005 levels through strengthened CO2 prices.

In addition, the ETS-II for buildings and transport is to be established. With this system the share of EU emissions falling under carbon pricing will rise to 75%.

Effort Sharing Regulation (ESR)

The remainder of EU emissions not covered under the ETS is subject to binding targets set at national level. The revision of the ESR (amendment 2023/857) requires member states to cut these emissions by at least 40% in 2030 compared to 2005 levels.

Member states define emission reductions in ESR sectors for 2030 according to their economic conditions and the costs to achieve these cuts. Compared to 2005 levels, the targets range from 10% for Bulgaria to 50% for Denmark or Germany.

In its Klimaschutzgesetz Germany also has moved the goal to reach climate neutrality to 2045. It aims to cut emissions in 2030 by 65% against a 1990 baseline. In the currently debated 2023 revision, sectoral targets are planned to be softened, but the overall goal holds.

Land Use, Land Use Change and Forestry (LULUCF)

The land use sector as a carbon sink is supposed to contribute to the EU climate goals too. The revisions to the LULUCF regulation (amendment 2023/839) for the first time sets a goal to remove 310 Mt CO2e from the atmosphere by 2030.

Accelerated efforts needed

Based on preliminary projections by the European Environment Agency (EEA) emissions in 2022 have sunk by 24% from to 3,247 Mt CO2e. This is a reduction by 64 Mt CO2e from 2021 – ca. 2% year-on-year.

Despite the progress made, these numbers also illustrate the challenge ahead. To reach the 2030 target, annual emissions have to be cut in the remaining 8 years by more than 1.100 Mt CO2e. This is the same order of magnitude of the reductions achieved since 2005 in more than double the time.

According to the yearly emission monitoring by Umweltbundesamt, emissions in Germany have fallen to 746 Mt CO2e in 2022, as also vetted by the inspection report by the expert council supporting the German government. This makes a cut of 40% from 1990, 24% from 2005, or 2% from 2021.

Steep cuts in energy and industry

Overall, one key instrument to bring down emissions has been the ETS, as also concluded by the recent EU’s carbon market report. EU Emissions in ETS sectors have fallen by 38% from 2005 to 2022.

Energy emissions from heating and electricity generation amounted to 924 Mt CO2e in 2022, down by 38% from 2005 levels despite a slight increase last year. These reductions are driven by the replacement of coal by gas and the expansion of renewable energy supply.

Emissions in energy-intense industry declined by 30% since 2005 reaching 691 Mt CO2e in 2022. These reductions are due to structural changes but also improvements in energy efficiency and low-carbon energy use.  

Also, Germany reduced its energy emissions by 36% and industry emissions by 41% since 2005. 

Transport and buildings lag behind

Progress in sectors covered by the ESR has been slower with a 17% cut of EU emissions between 2005 and 2022. Transport and building make most of these emissions.

Since 2005, the building sector reduced its emissions by 28% to 489 Mt CO2e. These reductions mainly result from less carbon-intense fuels for heating and improved energy performance of buildings, while population growth and larger homes pushed energy demand upwards.

Transport emissions have been cut by only 5% since 2005 to 803 Mt CO2e with a rise in 2022. Overall emissions have even increased since 1990 due to growth in kilometres travelled and car ownership rates. Electric cars and other environmentally friendly technologies helped to bring down emissions per kilometer.

Similarly, Germany’s emissions have fallen since 2005 by 27% in buildings and only by 7% in transport. 

2030 goals to be missed

At the current pace of emission reduction and with planned policies, the EU is projected to fall short of its 2030 goal to bring down overall emissions by 55% compared to 1990 levels to 2,121 Mt CO2e.

Accounting for more than 3,000 policy measures planned by member states, emission cuts by 2030 will make up 48% of 1990 emissions or 43% of 2005 emissions. Yet this still leaves a gap of over 300 Mt CO2e in 2030.

Emissions in ETS covered sectors are projected to fall to 59% of 2005 levels still short of the 62% goal. In ESR covered sectors, current and planned policies suggest a 27% drop from 2005 levels – far from the 40% goal.

In all sectors, the projected emissions under current and planned policies would miss the cuts needed to achieve the 2030 goal in a cost-effective way. The gap is most pronounced in the buildings sector.

For Germany, UBA’s projection report shows that with current measures its 2030 target cannot be reached. Additional planned measures, which are not yet implemented, could bring annual emissions down to the targeted 440 Mt CO2e in 2030.  This is mostly through strong cuts in energy, while industry, transport and buildings would all miss their targets.

Window for 2030 is soon closing

To achieve 2030 goals, not only an urgent implementation of planned policies is needed, but also further measures need to be taken quickly. Already implementation of decided policies can be a challenge, as the ETS expansion to buildings and transport, which could lead to substantial price increases for consumers.  

Moreover, a speedy uptake of additional policies is needed not to risk failing on 2030 targets early on. Member states are currently in the process to finalize their updated National Energy and Climate Plans (NECPs), which will need to define stronger policy measures. Germany has just handed in its NECP draft.

Looking beyond 2030, current GHG projections show even larger gaps. It remains to be seen to what extent carbon removals through natural sinks from the land use sector or technical solutions such as carbon capture and storage (CCS) can be mobilized to close some of these gaps.

On the path to climate neutrality in 2050, the definition of the EU’s emissions goal for 2040 will be an important guide point. The process for establishing the 2040 goals is currently underway, with a first proposal expected in the first quarter of 2024.  

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