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Explore whether the EU Emissions Trading System (ETS) affects European industry competitiveness and its implications for decarbonization and economic sustainability.
“The EU ETS is not destroying industrial competitiveness. It is adding flexibility”. said Daniele Agostini, the Enel industry representative present at the 2024 State of the EU ETS report launch event in Brussels that we attended this month. The EU ETS has been around since 2005 and has become robust and sophisticated, with many stakeholders integrating it into their key economic and sustainability decisions. Industry representatives continually reassess their operational and financial models to enhance their decarbonization efforts, in response to the costs introduced by the EU emissions trading scheme. The system is here to stay, it is effective, and constantly improving. A crucial feature is the redistribution of auction revenues from EUAs - those are reinvested in climate actions through member states' green projects (and other common green funds). Ongoing discussions focus on optimizing the allocation of these resources to bolster even more the long-term industrial decarbonization and the EU economic competitiveness.
The EU ETS is massive. The EU cap-and-trade in 2024 covers four main types of companies:
In 2023, approximately 11,000 installations were covered across all EU member states, Iceland, Liechtenstein, Norway, and Northern Ireland. You can see the visualization of the geographic distribution of the EU ETS covered installations here.
The most carbon-intensive industries are covered by the cap-and-trade scheme. At the 2024 State of the EU ETS report launch event, we got the chance to hear from representatives from the aluminum and ceramics industries, as well as the power production and distribution sector. Those are on the top of the list of the most polluting activities. Here is some data from the Our World in Data initiative regarding yearly CO2 release per sector (tonnes CO2e):
The EU ETS has a primary market where European Union Allowances (EUAs) are released by EU regulators, either sold through auctions or given away for free. The auctioning process is a key mechanism of the cap-and-trade system, as proceeds are redistributed to fund green projects. This creates an incentive for industries to decarbonize by making them pay for their carbon emissions, while also reinvesting funds to address the climate deficit.
Industry representatives at the event highlighted that the redistribution mechanism is a significant strength of the cap-and-trade system. However, they suggested that the system could be improved by specifying the nature of the "green projects" supported by the EU ETS. They emphasized that if the funded initiatives are linked to the industrial technological transition to more sustainable practices, it would align more closely with the original ETS objectives of industrial emissions reduction, that is the main focus in 2024.
Cap and trade schemes are effective because they provide essential decarbonization signals without prescribing specific operational methods or approaches. As highlighted by the Enel representative at the event in Brussels, industries are offered flexibility to determine the most suitable path toward sustainability, as long as they follow the emissions limits set by EU regulators. This flexibility encourages innovation and allows companies to adopt strategies tailored to their unique ways to operate while working towards common environmental goals.
During the event, the aluminum sector representative highlighted the challenges facing the European aluminum industry, noting a decline in capacity. They shared concerns over the substantial gap between European and Chinese production capacities - indeed China has put pressure on the European market in the recent past. Reuters reported last year that EU aluminum production has steadily decreased over the past 15 years, dropping from 4.5 million metric tons to the current 2.7 million metric tons. Emanuele Manigrasi who was present at the Brussels event reminded that the rising carbon costs cannot be passed on to the end-consumers, so the ongoing improvements of the scheme have to be enhanced.
"The CBAM sends the correct decarbonization signal internationally," stated the political representatives at the event. They emphasized that this is just one method to address EU competitiveness and carbon leakage concerns. Also, free allowances are still allocated to prevent the EU ETS from being perceived as a “threat”. Moreover, some of the green projects financed by the EU ETS auctions already focus on supporting industrial decarbonization efforts, particularly through the innovation fund.
The EU ETS has been successful in decarbonizing the power sector. Now the medium and long-term focus is shifted towards decarbonizing the industrial sector for EU economies. Indeed, since the scheme's inception, the power sector has accounted for 75% of the total emissions.
Stakeholders emphasized the significance of reevaluating how the proceeds from EUA auctions can be strategically directed towards the EU industry, ensuring alignment with their decarbonization efforts while maintaining competitiveness. With the gradual phasing out of free allowances and the implementation of the CBAM, the years to come will show the adaptability of the ETS to the evolving social and economic realities across Europe. This period will likely witness innovative adjustments within the ETS framework to effectively balance environmental objectives with industrial competitiveness.
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