The European Union considers itself to be a global leader in limiting emissions, decarbonising economies and other measures to limit global warming. To this end, the European Union has signed the UNFCCC and Kyoto Protocol, along with its Member States, and has taken a leading role in climate change negotiations (including forming a high ambition coalition in the Paris Agreement negotiations).
Internally, the European Union has adopted as a central policy the '2030 Climate and Energy Package', a range of climate change measures with three key targets: achieving a 40 per cent cut in greenhouse gas emissions (from 1990 levels), 27 per cent of EU energy from renewables and 27 per cent improvement in energy efficiency.
The package includes the Renewable Energy Directive, which sets binding national renewable energy targets for Member States, and the Energy Efficiency Directive. In addition, an Effort Sharing Decision sets differential caps for Member State emissions from sectors falling outside the EU emissions trading scheme, amounting overall to a 10 per cent cut in those emissions by 2020, and the Carbon Capture and Storage Directive establishes a legal framework for environmentally safe geological storage of CO2. Further, in November 2017, the Commission proposed a new set of targets concerning the transport sector and more specifically, to lower the EU average of CO2 emissions of new passenger cars and vans through the Clean Mobility Package. The Commission recently proposed a new long-term strategy to reach a climate-neutral economy by 2050. To reach a climate-neutral economy, the Commission proposes pursuing joint action in seven strategic areas:
- energy efficiency;
- deployment of renewables;
- clean, safe and connected mobility;
- competitive industry and circular economy;
- infrastructure and interconnections;
- bio-economy and natural carbon sinks; and
- carbon capture and storage to address remaining emissions.
The centrepiece of the European Union's environmental and climate change regime is the EU ETS. More than 11,000 power stations and industrial plants in 31 countries (28 EU Member States and three EEA/EFTA states), as well as from aviation activities, fall within its scope of greenhouse gas emissions reduction. In practice, this means that the EU ETS covers around 45 per cent of the European Union's greenhouse gas emissions. In the simplest terms, the EU ETS is a 'cap and trade' system. It works by putting a limit on overall emissions from industry sectors emitting high levels of greenhouse gases, and the limit is reduced over time. Within that limit, companies may buy and sell emission allowances as needed. Each allowance represents the right to emit one tonne of carbon dioxide equivalent (CO2e) emissions. The number of allowances issued determines the volume of emissions permitted, and in that way emissions are 'capped'. The idea is that the cap – and thus emissions – is reduced over time. Allowances are distributed, by allocation or auction, to installations and can be freely traded on the market. Each year, installations must surrender allowances equivalent to the amount of CO2 emitted. In this way, the price is (at least partially) determined by the market.
For installations to receive free allowance allocations, they must meet the relevant sector's benchmarks. For those installations that are not at a significant risk of carbon leakage, free allowances decline annually, to 30 per cent of all allowances in 2020 and no free allowances available in 2027. The power generation sector is not eligible for free allocation, except under special conditions in a few Member States.
A market stability reserve will start operating in January 2019, which aims to address the current surfeit of allowances and make the EU ETS resilient to shocks by allowing the supply of allowances to be auctioned to be subject to adjustment. Phase 4 of EU ETS for 2021 to 2030 has recently been published. Phase 4 focuses on (1) strengthening the EU ETS as an investment driver by increasing the pace of annual reductions in allowances to 2.2 per cent as of 2021 and reinforcing the above-mentioned market stability reserve; (2) continuing the free allocation of allowances as a safeguard for the international competitiveness of industrial sectors at risk of carbon leakage; and (3) helping industry and the power sector to meet the innovation and investment challenges of the low-carbon transition via several low-carbon funding mechanisms.