What a 55% 2030 emission reduction target means for the EU ETS

This analysis has originally been published for ICIS EU carbon subscribers on 18 Jul 2019 at 15:55 CET. 

The honest answer is, we don’t know, as it strongly depends on the share between the ETS and the non-ETS reduction targets. However, assuming that the share between ETS and non-ETS targets remains unchanged from the current 2030 set-up, the EU ETS reduction target would have to increase from currently 43% compared to 2005 levels to between 52% and 57% in order to match the latest announcements by Commission President-elect Ursula von der Leyen. An important question remains on the likelihood and the timing of the target change decision as this will have significant implications for the cap trajectory and could lead to a sharp decline of allowances available in the second half of TP4.

Reducing EU’s emissions by 2030 by 50, if not 55%

• Before being elected as Commission President, Ursula von der Leyen proposed bolder emissions targets to European Parliamentarians during her speech on 16 July 2019 , with a reduction of 50% to 55% by 2030 and committed to submit a plan for a “Green Deal for Europe” and a European Climate Law within her first 100 days in office
• She was elected with a razor-thin margin of 383 votes to 327, with 374 votes required to carry her into office
• The 55% reduction target is in line with a non-binding resolution of the Parliament from 14 March 2019
• However, back then, von der Leyen’s EPP did not commit to the 55% proposal

The overall EU target

• In order to analyse the implications for the EU ETS it is required to put the 50 to 55% overall EU emission reduction target (compared to 1990 levels) into context, thus accordingly splitting it between the EU ETS and the non-ETS targets for 2030
• 1990 EU emissions were at 5,720 Mt and provide the starting point for the distribution of the target emission levels between ETS and non-ETS sectors as published by the European Energy Agency (EEA)
• The current EU-wide 2020 target is to reduce emissions to 4,576 Mt by 2020 (-20% compared to 1990) and to 3,432 Mt by 2030 (-40% compared to 1990)
• Back calculating on the 1990 value of 5,720 Mt, the 50% and 55% targets would lead to new 2030 overall targets of 2,860 Mt (50% reduction compared to 1990) and 2,574 Mt (55% reduction target)

 What does it mean for the EU ETS target?

• Based on the current setting, the EU ETS has a 40% share on the 2020 target emissions and a 39% share on the 2030 target emissions while the larger share of target emissions remains with the non-ETS sectors such as transport and residential
• Using the current 2030 target distribution between EU ETS/non-ETS target emissions would result in the following split of emission reductions required for ETS and no-ETS sectors

• This would mean an extra 222Mt for the EU ETS from the current 2030 target to the 2030 (50%) target. The 2030 (55%) target would reduce ETS emissions by 333Mt compared to the 2030 target currently in place.
• Calculating the emission reductions required from EU ETS sectors compared to 2005 levels, the 50% EU wide target would increase the emission reductions required from the EU ETS from currently 43% compared to 2005 levels to 52%. This would increase further to 57% in case of an EU-wide 55% reduction target
• However, we believe that the target share between ETS and non-ETS will likely have to be shifted more towards non-ETS sectors such as transport and residential in order to account for the significant need for reductions in these sectors.

Annual cap reductions could double, depending on timing for taking the decision

• Given the political complexity of the topic, there are several timing scenarios that need to be looked at for a possible implementation of the target change
• This is especially relevant when considering changes to the steepness of the cap trajectory and the resulting linear reduction factor (LRF)
• At the moment, the LRF for all years during TP4 is at -2.2%, resulting in an annual cap reduction of 48.4m allowances
• In case the decision for a 50% or 55% emission reduction target takes effect already by 2021, the LRF would change to
  • 3.2% (-70.6m allowances) for a 50% target
  • 3.7% (-81.7m allowances) for a 55% target
• A later decision would lead to a more disruptive cap trajectory change from 2.2% during the first five years of TP4 to:
  • 4.2% (92.8m allowances) for a 50% target
  • 5.2% (115.0m allowances) for a 55% target
• Comparing this to the trajectory required to get to zero EU ETS emissions by 2050, a 2.86% LRF would be required as of 2026 (-63.0m allowances p.a.)
• Therefore, the timing of the target increase and the pathway towards such target change is of critical importance to market participants

Likelihood of implementation

• Despite the statements made by von der Leyen, this is far from being implemented; such target change requires political backing by heads of states as well as by the Parliament
• The target adoption, as well as the relevant details of how to split such target into ETS and non-ETS burden, will take time
• Especially in a market environment where the EU Dec-19 price trades close to the €30/t level, several political actors will have difficulties accepting a more ambitious reduction target for the EU ETS
• However, von der Leyen’s statements are officially recorded as her agenda and she will be measured against that

Marcus Ferdinand is Head of European Carbon & Power Analytics at ICIS. He can be reached at Marcus.Ferdinand@icis.com

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