The European Union Emission Trading System (EU ETS) and the new EU Carbon Border Adjustment Mechanism (CBAM) will force companies to incorporate the environmental costs associated with emissions into their operations. This establishes a system where polluters pay, and creates appealing investment opportunities in sustainable endeavors. Additionally, this approach provides incentives for other countries to adopt similar regulations, potentially initiating a new green wave on a global scale.
Europe’s plan to achieve Net Zero
The European Union (EU) has set the ambitious goal of reaching net-zero emissions by 2050, balancing greenhouse gas (GHG) emissions with the amount removed from the atmosphere. The roadmap for the EU’s net-zero target is outlined in the European Green Deal, a comprehensive plan for sustainable growth and climate action.
In July 2021, the EU adopted the European Climate Law, which legally binds member countries to reduce GHG
emissions by at least 55% by 2030 compared to 1990 levels. The EU is aiming to increase the share of renewable energy sources in its energy mix. The goal is to reach at least a 32% share of renewable energy consumption by 2030 and to promote the use of clean energy technologies such as wind, solar and hydropower. Additionally, the EU aims to improve energy efficiency across various sectors, including buildings, industry, and transport.
The EU created an Emission Trading System (EU ETS) that has served as a model for other carbon markets worldwide. EU ETS hands out emission certificates (1 certificate = 1 ton of CO2) to companies. If a company exceeds its limit, it needs to purchase new certificates from firms that did not use their allowance cap. These provide incentives to decarbonise. Consequently, the total number of emission allowances available in the market decreases over time to put pressure on companies to reduce their emissions. The newly approved regulation will continuously reduce the number of credits available.
The recently approved Carbon Border Adjustment Mechanism (CBAM) aims to prevent carbon leakage and ensures a level playing field for EU industries. The CBAM will impose a carbon price on certain imported goods from countries outside the EU. The main objective of the CBAM is to address the risk of carbon-intensive industries relocating to regions with lower climate standards, which could undermine the EU’s efforts to reduce greenhouse gas emissions worldwide. Additionally, from 2026 the EU will apply a gradually increasing carbon tax (phase-out of free allowances) applying to the total continental and import emissions. The effects of the new legislation are unlikely to be limited to Europe as the CBAM entices other countries to impose a similar tax scheme to avoid missing out on tax income. The CBAM allows tax deductions if carbon taxes have already been paid outside of the EU, potentially paving the way for a global approach to pricing carbon emissions.
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