Industry should not rely on negative emissions to compensate for the ending of new EU Emission Trading Scheme (ETS) allowances from 2039, experts have told Euractiv.
Under ETS, around 10,000 power plants and large industrial factories are obliged to validate certificates, known as emission allowances, whenever they emit CO2 into the atmosphere.
From 2039, no new allowances will be made available, meaning that, apart from using previously saved allowances, companies will not be allowed to generate emissions.
Some lawmakers argue that negative emissions could allow factories to continue emitting CO2 beyond 2039. In this scenario, CO2 captured from the atmosphere via ‘Direct Air Capture’ technology or through natural carbon sinks would be used to create new allowances.
However, experts are warning industry against relying on such negative emissions.
“These will be super small amounts that will at best be sufficient to offset residual emissions from plants with CCS [Carbon Capture and Storage], electric steelworks or process-related emissions from the chemical industry,” researcher Felix Matthes of the German Öko Institute told Euractiv.
“But it will no longer be possible to operate a conventional steelworks or fossil-fueled power plant. These negative emissions, for which all the rules are still outstanding, will not be sufficient,” he added.
He also noted that negative emissions would be needed by non-ETS sectors, like agriculture.
Michael Pahle, head of the research group for climate and energy policy at the Potsdam Institute for Climate Impact Research (PIK), similarly warned companies against what he calls “mitigation deterrence, i.e. the delaying of emission reductions in anticipation of cheap and abundant negative emissions in the future”.
“If companies expect this to be the case and hold up their investment in clean technologies, then, if this expectation will not materialize, they’ll have used up a lot of certificates that would have been better saved to avoid high costs in the future,” he said.
Centre-right EU lawmaker Peter Liese, who previously led negotiations for the European Parliament on the carbon market, told Euractiv in May that he wanted to see negative emissions included in the ETS, to avoid a scenario where there are “no longer any certificates in the system from 2039.”
The European Commission will have to present options to include negative emissions into the ETS scheme by 2026.
All ETS allowances used up by 2039?
Experts differ on how the ETS will play out in the late 2030s.
“The last fresh certificates will be issued in 2038, but we assume that after this date there will also no longer be any certificates in the market as a whole,” Matthes said, meaning the industry would not have saved allowances from previous years.
Matthes added that he “would never argue whether this point [of zero allowances] is reached in 2038 or 2039. But it’s not 2045”.
A similar point was made in a recent report Matthes published with three other economists on the German energy transition, commissioned by the German Ministry for Economy and Climate.
“Installations regulated by the EU ETS will have to reduce their emissions to zero before 2040,” Matthes, Andreas Löschel, Veronika Grimm, and Anke Weidlich wrote.
This would be the case “even taking into account the release of emission allowances from the market stability reserve,” they added.
The market stability reserve is a mechanism in the ETS designed to eliminate a surplus or a scarcity of allowances, either by taking excess allowances out of the market in times of surplus or releasing them back in times of scarcity.
However, Matthes’ certainty is not shared by all.
“The only thing that can be said with certainty is that, as legislation stands now and small legacy volumes from the aviation cap aside, no new certificates from 2039 onwards will be issued,” Pahle told Euractiv.
“If you take a rather pessimistic view on the use of certificates by firms, then you will probably end up in the situation described by Felix Matthes: nothing left,” he said.
However, he added, “if you look at the situation rather optimistically, firms will have made the necessary investments in clean technologies to reduce their emissions substantially”.
Pahle and other researchers have long been urging policymakers and industry to prepare for an ETS ‘endgame’ which sees the ‘cap’ of newly sold emissions allowances reaching zero.
While experts debate the ETS’ conclusion, market actors appear more focused on the more immediate term.
“So far (…) the CO2 prices in the EU ETS do not reflect this long-term scarcity situation,” the report by Matthes, Löschel Grimm, and Weidlich noted.
Allowances in the ETS currently trade at around €70 per tonne of CO2, well below a previous price of €100 in February 2023.
[Edited by Donagh Cagney/Zoran Radosavljevic]
