New developments in the EU Emissions Trading System (EU ETS) – What is the impact on your company?

Future reforms to the EU ETS are expected to strengthen two trends which have a direct impact on ETS installations: carbon prices are expected to increase even further, and allocation levels could decrease more than expected.

CLIMACT can help you to manage the risks and opportunities of these changes, by providing regulatory advice, facilitating trading, and providing forecasts of carbon prices and allocation levels.

Want to know more about how we can help you? Read further below and contact our experts: Dimitri (dm@climact.com) and/or Pieter-Willem (pwl@climact.com)

What are the expected modifications to the EU ETS in 2021?

Following the EU Green Deal and starting in 2021, the EU ETS is expected to be revised. The following major topics are currently on the agenda:

What can be expected from these reforms?

Overall, we expect that the coming years, these changes will reinforce two major trends that have already materialized since the last reform (2018) and which will have a direct impact on companies covered by the system:

Firstly, the carbon price has been steadily increasing, and this increase is expected to continue into the future. Since the end of 2017, the price of an EU emission allowance (or EUA) has steadily increased to a recent historical high above €35 per tonne of CO_2., and this despite a considerable drop in emissions due to COVID-19 and faster than expected decarbonisation of the power sector. With the recent agreement on an increased -55% GHG reduction objective for 2030 this increase is expected to continue into the future. A potential extension of the system will further exert upwards pressure on the price. This increased price impacts ETS covered installations both directly as indirectly (through higher electricity prices)

Secondly, allocation levels could go down even more than expected, due to a complex interaction of three different drivers: benchmark values for 2021-2025 will be decreased considerably (for many products, up to -24%), the introduction of a Carbon Border Adjustment Measure could lead to a phase-out of free allocation for some sectors, and a tightening of the cap (in line with the -55% objective) will increase the probability of a Cross Sectoral Correction Factor. Decreasing levels of free allocation means that more and more companies will have to turn to the market to obtain sufficient allowances to ensure compliance with the EU ETS.

How would this impact your company?

These trends imply that your company might face higher compliance costs in the future, and that you might have to turn to the market to acquire sufficient allowances to cover your emissions. This is in particular the case for installations that expect their allocation levels to fall below their annual emissions in the future.

On the other hand, these trends also create opportunities: they increase the expected return on Investment for reduction measures, and increase the value of any surplus allocation that can be realized.

How can CLIMACT help your company to cope with these changes?

CLIMACT is a leading climate change consultancy firm, that has been supporting companies since 2007 in the climate transition, by developing reduction strategies as well as by providing regulatory advice – including on the EU ETS. We offer the following services to installations covered by the EU ETS:

• Regulatory advice: we can provide tailor-made regulatory advice for ETS-covered companies, including assessing the impact of certain operational or investment decisions on EU ETS obligations and allocations;
• EUA trading service: we facilitate bilateral trades between different parties;
• Free allocation and carbon price projections: our modeling tools provide insights in the long-term development of the EU carbon price and expected levels of free allocation for the different sectors.

If you want to take advantage of the opportunities or mitigate the risks resulting from the evolution of the EU ETS, do not hestitate to get in touch with one of our experts :

Dimitri Mertens is a founding partner of CLIMACT where he heads the regulatory department. Priorly working for the European Court of Justice, he has helped organizations to navigate the intricacies of the EU ETS since 2007. He has a deep practical knowledge of the EU, national and regional legal framework pertaining to energy and climate change (dm@climact.com + 32 475 314 414).

Prior to joining CLIMACT, Pieter-Willem Lemmens worked on the EU ETS for 8 years as policy officer for the Flemish Climate Administration. In this position, he has worked both on the reform of the EU ETS as its implementation within Flanders. He has an in-depth expertise in the functioning of the system, from overall design to more technical topics such as allocation and MRV-rules (pwl@climact.com  – + 32 485 65 51 62).   

Sources: CLIMACT, the European Energy Exchange (EEX), European Comission (europa.eu), Carbon Pulse.