What sectors are covered by the EU ETS?
Summary
The EU Emissions Trading Scheme (EU ETS) is expanding beyond power and industry to include aviation (intra-EEA flights), maritime shipping (since 2024), and potentially buildings, road transportation, and agriculture to achieve carbon neutrality; this also includes buying carbon allowances in the European carbon market. This sustainable investment and climate finance effort aims for responsible investing and impact investment in areas like renewable energy through mechanisms like carbon tax and green bonds.
Since its inception, the European Union Emissions Trading Scheme (EU ETS) has expanded its coverage to encompass as many carbon emissions as possible.
Early Focus: Power Production and Industry
Electricity and heat generation are the decarbonization champions
The power production sector, which accounts for just under 30% of total EU carbon emissions, has always been a primary decarbonization target for the EU ETS. The scheme has achieved significant emissions reductions in this sector, mainly thanks to the rapid phasing out of free allowances. The power sector is responsible for nearly 75% of the emissions reductions achieved by the cap-and-trade scheme up to date.
Making the industry cleaner
Since the first years of operation, the EU ETS also covers energy-intensive industries, including oil refineries, steelworks, and the production of iron, aluminum, metals, cement, lime, glass, ceramics, pulp, paper, acids, and bulk organic chemicals. With significant results already visible in the power sector, the focus is increasingly shifting towards decarbonizing these energy-intensive industries.
Expanding Scope: Aviation and Maritime Shipping
Intra-EEA flights covered
Since 2012, the EU ETS includes carbon emissions from aviation, however only for intra-European flights. Discussions are ongoing to extend this coverage to all flights arriving in and departing from the EU, as currently only around 20% of flights departing from Europe are covered.
Adding the maritime shipping industry
In 2024, the EU ETS expanded to include the maritime shipping sector, which accounts for 3-4% of the EU's total CO2 emissions. This sector has a significant decarbonization potential, and shipping companies are required to submit EUAs for a progressively increasing proportion of their emissions, reaching 100% by 2027.
Future Directions: Buildings, Road Transportation, and Agriculture
The EU ETS 2, a new cap-and-trade scheme
Looking ahead, a new ETS scheme, separate from the current EU ETS, will be introduced in 2027 to cover CO2 emissions from building construction and road transportation. This new scheme is necessary because pricing in these sectors could affect a large proportion of households. It will include robust funds redistribution mechanisms to mitigate any adverse effects on low-income citizens.
Pricing emissions from agriculture
The inclusion of emissions from the agriculture sector under the EU ETS is also under discussion. This is a sensitive topic, as it could cause social disruptions, but agriculture remains a significant source of carbon emissions. Denmark's recent implementation of a tax on agricultural emissions sets a precedent, suggesting that the EU can eventually follow suit.
The EU ETS has been consistently expanding its scope to tackle new challenges and sectors. It will continue to include more gases until it fulfills its mission - bring Europe to climate neutrality by 2050.
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