EU Emissions Trading: A Path to Efficient Greenhouse Gas Reduction?

What is European emissions trading?

EU emissions trading (ETS for short) was adopted in 2005 as the European Union's central instrument for cost-effective reduction of greenhouse gas emissions within the European Union. By 2030, greenhouse gas emissions are to be reduced by at least 55 percent compared to 1990 levels ¹. The ETS is also designed to help companies reduce their emissions while remaining competitive. According to the UN criteria, operators of energy plants, energy-intensive industrial plants, aircraft operators, metal processing plants and manufacturers of paper and cellulose are covered by emissions trading, plus shipping ²,³. From 2027, the transport, fuel and buildings sectors will also be affected ¹. 

How EU emissions trading works

The system is based on the "cap and trade" principle, in which an upper limit (cap) is set on total emissions. The cap is gradually lowered to reduce total allowable emissions to zero by 2050. These total emissions are in turn divided into emission rights, which are issued to companies. The market for emission rights is created by allowing companies to trade these rights.

Within this cap, companies receive CO₂ certificates that entitle them to emit a certain amount of CO₂ ⁴. This creates incentives for companies to invest in climate-friendly technologies and processes ⁵. Part of the emission allowances is auctioned, while another part is given to companies free of charge ⁴. Allocation is based on various criteria, such as historical emissions or production capacities.

Why is emissions trading relevant for companies?

EU emissions trading has a direct impact on greenhouse gas emissions and the business activities of companies, particularly in the energy, industry and aviation sectors ⁶.
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On the one hand, emissions trading affects the costs and competitiveness of companies. By reducing their emissions, companies can sell surplus emission allowances and thus generate additional revenue. On the other hand, companies that do not reduce their emissions sufficiently have to buy additional emission rights. This creates incentives to invest in climate-friendly technologies and processes and remain competitive ⁵.

In addition, by trading their emission rights, companies can manage their risk in terms of compliance with emission targets. Companies can react flexibly to changes in their emissions balance and achieve their set targets.

From a holistic perspective, emissions trading helps companies to implement their sustainability strategy. Through targeted engagement with a focus on reducing greenhouse gas emissions, companies contribute to mitigating the climate crisis. This commitment can be communicated, which in turn goes down well with customers and consumers, who are placing increasing value on sustainable products and services. Companies that are already taking action are thus improving their corporate reputation and serving customer demand.

What are concrete to-dos for companies with regard to emissions trading?

1. Emissions monitoring: Companies should closely monitor and analyze their emissions to understand and reduce their output.
2. Investing in sustainability: By investing in energy-efficient technologies and renewable energies, companies can reduce their emissions .
3. Management of CO₂ certificates: Companies must manage their CO₂ allowances and ensure that they have sufficient allowances for their emissions.
4. Process optimization: Optimizing production and operating processes can lead to a reduction in emissions.

Sustainability is thus also becoming a business opportunity in a changing world through emissions trading. Companies must act proactively and focus on competition, not only for their own benefit, but also for the well-being of us all and the preservation of our planet.

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Sources:

¹ BMWK - European Parliament confirms agreement on EU emissions trading reform

² DEHSt - European Emissions Trading

³ Confirmation in final trilogue: emissions trading in shipping from 2024 :: MEW (mew-verband.de)

⁴ The European Emissions Trading | Federal Environment Agency

⁵ 130919_Emissionshandel.pdf (insm.de)

⁶ Printed Paper 19/32706 (bundestag.de)

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