Politique énergétique

 [1] [2]

1. HOW DOES THE EU ETS WORK ?

The rationale underlying the EU ETS is relatively straightforward. The adverse effects of greenhouse gas emissions generated by economic activities are not fully reflected in investment decisions and are therefore not adequately taken into account by emitters. In economics, an externality refers to “the indirect effects that have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account” [3]. CO2 emissions from fossil fuel consumption are a clear example of a negative externality : they have adverse effects on third parties, notably by contributing to global warming. Yet, no market interaction takes place between emitters and those who bear the consequences. In other words, an entity that emits CO2 contributes directly to increasing the concentration of CO2 in the atmosphere, thereby imposing costs on others without compensating them.

The EU ETS is therefore designed to assign a market value to CO2 emissions. It is based on the polluter-pays principle, according to which “the costs incurred to prevent, reduce or combat pollution or any other damage to the environment are borne by the party held responsible for it” [4]. In the absence of carbon pricing, emitters do not bear the full cost of the adverse effects generated by their activities and thus have little financial incentive to take those effects into account in their investment decisions. The EU ETS therefore seeks to address this problem by internalising the environmental cost of greenhouse gas emissions in economic decision-making.

The EU ETS entered into force on 1^st January 2005 and is currently in its fourth phase (2021-2030). It operates in all 27 EU Member States as well as in Iceland, Liechtenstein and Norway, and also covers electricity generation units in Northern Ireland [5]. In 2023, it covered emissions from 8,704 installations in the electricity generation, heat generation and industrial sectors [6]. The EU ETS covers around 40% of total EU emissions [7]. Annex I to Directive 2003/87/EC defines the categories of industrial activities falling within the scope of the EU ETS. The following table presents the types the categories of installations covered.

Categories of industrial activities covered by the EU ETS :

 [8] [9]
Source : Directive 2003/87/CE

The EU ETS is a quantity-based regulatory instrument. A total volume of allowed emissions, also known as the carbon budget, is set on the basis of GHG emission reduction targets to achieve the EU’s climate objectives. The European Commission sets this emissions cap, which declines linearly over time. Under the Fit for 55 package, the 2030 emission reduction target for the sectors covered by the EU ETS was increased from 43% to 62% below 2005 levels. Accordingly, the linear reduction factor was raised from 2.2% to 4.2% for 2024-2027 and to 4.4% for 2028-2030 [10].

Once the trajectory has been set, the Commission auctions carbon allowances. Each allowance represents the right to emit 1  tonne of CO2eq. Economic actors can obtain these allowances either at auction on the primary market or by trading them with one another on the secondary market. During the auction, the interaction between companies’ demand for allowances and the supply set by the cap determines the price per tonne of CO2. At the end of each year, installations covered by the EU ETS must surrender a number of allowances equal to their total emissions. Each company can therefore choose to reduce its emissions and/or acquire allowances, either at auction or from other companies on the secondary market.

Verified emission levels, 2019-2024 :

Source : Report from the Commission to the European Parliament and the Council on the Functioning of the European Carbon Market in 2024

This chart shows verified CO2 emission levels and their annual change. In 2024, verified emissions fell by 5.8% compared with 2023, a much smaller reduction than in 2023 (-16%). Electricity and heat generation was the main contributor to the overall reduction in EU ETS emissions, with emissions from this sector falling by 10.7% compared with 2023 [11], largely owing to the decarbonisation of the electricity mix in Europe.

Focus on the marginal abatement cost :
Reducing emissions entails a different cost for each company (depending on its structure and activity). This abatement cost generally rises with the quantity of emissions to be reduced. Each company therefore has a different marginal abatement cost. A company’s marginal abatement cost is the additional cost it must bear to reduce its emissions by one more unit. It depends on a wide range of parameters : available technology, sector of activity, regulatory developments, market players’ expectations, etc.
Consequently, for a given carbon price, not all companies have the same incentive to invest in reducing their CO2 emissions. A company will only invest in reducing its emissions if the cost of emitting (the carbon price) is higher than its marginal abatement cost. In the absence of a carbon price, companies therefore have no incentive to reduce their emissions, as their emission costs are zero. Conversely, the higher the carbon price (and therefore the higher the cost of emitting for a company), the greater the company’s financial interest in investing to reduce its emissions. This makes it possible to prioritise decarbonisation investment by targeting first the activities that are cheapest to decarbonise, until the carbon price reaches a level high enough to decarbonise more costly activities.

2. HOW ARE EU ETS REVENUES USED ?

Auctioning allowances is a significant source of revenue for Member States. In 2024, auctioning revenues totaled €38.8 billion, of which €24.4 billion went directly to Member States [12]. Of the remaining €14.4 billion, €6.3 billion went to the Modernisation Fund, €2.2 billion to the Innovation Fund and €2.8 billion to the Recovery and Resilience Facility.

Breakdown of 2024 revenues from the sale of carbon allowances :

Source : Report from the Commission to the European Parliament and the Council on the Functioning of the European Carbon Market in 2024

The Innovation Fund is a funding programme for the deployment of innovative low- and zero-carbon solutions and technologies in the energy, industry and carbon-neutral mobility sectors. It differs from the Modernisation Fund, a solidarity programme that supports lower-income Member States in meeting their climate targets. The Recovery and Resilience Facility was set up to help Member States revive their economies during the COVID-19 pandemic and build a more sustainable, digital and resilient economy.

However, Member States must comply with certain rules on the revenues they collect from auctions. Under Article 10(3) of Directive (EU) 2023/959, since June 2023 Member States have been required to use 100% of their auctioning revenues to support climate action and the energy transition, with the exception of aid to electro-intensive industries to compensate for indirect carbon costs.

What is the indirect carbon cost compensation ?
Compensation for indirect carbon costs allows Member States to offset part of the carbon costs reflected in wholesale electricity prices for electro-intensive industrial consumers in sectors exposed to international competition and to the risk of carbon leakage [13] (aluminium, hydrogen, fertilisers, steel, paper, copper, etc.). It compensates for the absence of free allowances for electricity generation – unlike the direct consumption of fossil fuels, which does benefit from them – and therefore for the carbon price paid in Europe. This allows companies exposed to international competition to remain competitive against regions where carbon pricing is weak or non‑existent. It takes the form of aid paid by Member States : each Member State may spend up to 25% of its ETS auctioning revenues on it with no justification, and may compensate up to 75% of the eligible costs.

This change is therefore intended to encourage Member States to step up investments in industrial decarbonisation, the energy transition, clean technologies, climate change adaptation, decarbonisation of the transport sector and just transition measures. In total, Member States allocated €3.2 billion [14] to reduce indirect carbon costs for electro-intensive industries.

The figure below shows the trend in EU ETS auctioning revenues and their use by Member States over the 2013-2024 period. Revenues from auctioning EU ETS allowances are a growing source of income for Member States and have risen considerably since 2017, in line with the carbon price.

Breakdown of Member States’ use of auctioning revenues :

*The change in expenditure categories is due to a methodological change introduced in 2023
Source : Auctioning revenues generated and reported usage, European Environment Agency (EEA)

As the chart shows, spending data for 2023 and 2024 [15] give the breakdown, by category of action, of revenues used for domestic purposes. In 2024, 80% of the revenues used domestically went to energy supply, grids and storage, industry, road transport, public transport and active mobility. Overall, the amounts spent on projects at international level have remained modest and relatively stable since 2018 (roughly €100-200 million a year) [16].

Daily CO2 price in Europe (2013-2026) :

Source : EEX

As noted above, EU ETS revenues paid to Member States amounted to €24.4 billion in 2024, compared with €4.9 billion in 2017. Meanwhile, the price reached an annual average of €65/tCO2 in 2024, compared with €5/tCO2 in 2017.