The EU’s recent proposal for a 2030 EUETS target does not look very ambitious

The EU’s recently announced greenhouse gas emissions target for 2030 looks like just enough to keep the 2050 target credible, but seems unlikely to be perceived as highly ambitious by other jurisdictions.  

The European Commission has recently proposed a target of reducing EU greenhouse gas emissions to 40% below 1990 levels by 2030.  Sectors covered by the EUETS (power generation and large industry) will be required to reduce emissions to 42% below 1990 levels.  This post takes a look, using some rough-and-ready analysis, at how onerous the EUETS target would be if implemented.   The Commission also announced a proposal to establish a “market stability reserve” for the EUETS.  I will return to this proposal in a future post, but for now the analysis excludes its effect.  The analysis also excludes the temporary delay of allowances sales over the next few years (backloading), which does not affect cumulative totals to 2030 in the absence of the stability reserve.

A target of a 40% reduction by 2030 is on a straight line track from the 20% mandated by 2020 towards the least stringent end of the 2050 target, which is an 80-95% reduction from 1990 levels.  This appears to be the minimum reduction likely to retain the credibility of the 2050 target, especially given the current surplus of allowances in the EUETS.  A smaller reduction by 2030, requiring deeper cuts to be achieved more rapidly towards 2050, would likely have increased the perceived probability that the 2050 targets would not be adhered to.

There is currently a surplus of EU allowances of around 2.2 billion tonnes, equivalent to about one full year of emissions covered by the scheme.   This scale of surplus has arisen mainly due to the severity of the recession in Europe.  Emissions currently remain below the cap, and even as the cap tightens it will take more than a decade for the surplus to disappear.

This is illustrated in the chart below.  The cumulative cap on emissions between now and 2030 (green line) starts at level of the current surplus.  It then increases, but less rapidly each year as the annual cap comes down.  This is compared with the illustrative case of annual emissions are constant at 2012 levels (solid blue line), so cumulative emissions grow linearly.  In this case, with no reduction in annual emissions, the surplus disappears in around 2026.  However in practice power sector emissions are expected to fall over the period (see below), reducing cumulative emissions (dashed blue line).  This leads to the surplus disappearing only in 2029, and reduces the cumulative shortfall by 2030 to quite low levels, assuming emissions from industry are constant.  Aviation is excluded from these totals.  Although internal flights remain covered by the EUETS, the associated cap remains unclear.

Cumulative emissions (excluding aviation) and the cumulative cap (including current surplus) show a deficit emerging only in the late 2020s …

 Cumulative surplus

The power sector is the largest source of emissions covered by the EUETS, so is crucial to demand for allowances.  There may be some increase in electricity demand over the period, and hence in demand for allowances.  The increase may be smaller with strong efficiency measures, or larger if there is very rapid uptake of electric vehicles, and will also vary more generally with GDP growth over the period.  There is also likely to be a decrease in nuclear generation to 2030 as older plant comes to the end of its working life and is not replaced by an equal amount of new plant.

However the growth in demand and fall in nuclear output seem likely to be more than offset by continuing growth in generation from renewables.  This implies a net decrease in the need for fossil generation, leading to lower emissions in the absence of changes to the fossil fuel mix.  However there may be some increase in emissions from internal EU  aviation, although any increase is likely to be much smaller in absolute terms than the decrease from the power sector.  Trends in emissions from industry, assumed to stay constant here, will also affect the total.

Together these trends might lead to a cumulative excess of expected emissions over the cap of around a billion tonnes by 2030 (about 3% of the total), including some growth in emissions from domestic aviation.   Projections of emissions over more than a decade and a half are obviously uncertain, and the cumulative total could easily vary by a billion tonnes or more from this total.  Nevertheless, it seems likely that the shortfall in allowances cumulatively over the period will be somewhere in the low- to mid- single figures percent of the total over the period, with the market remaining in surplus until the late 2020s.   The additional abatement required to eliminate the shortfall in this case could be achieved by a moderate amount of fuel switching.  And scenarios where a surplus of allowances persists through to 2030 are not hard to construct.  (The shortfall is somewhat increased if you take the view that there is a permanent stock of allowances needed to enable hedging in the market,  Some estimates indicate that this is around a billion tonnes, which would increase the shortfall to around 6% in the scenario above.  However it is by no means clear that this is needed through the 2020s, and anyway it remains easily accommodated by fuel switching,  Conversely around an extra 800 million allowances unused from the New Entrant Reserve  may come into the market at the end of Phase 3 in 2020, further reducing any shortfall )

Any substantial scarcity that does emerge seems likely to be as a result of banking of allowances into the period after 2030, either as a result of private sector banking or the operation of the market stability reserve, which effectively mandates a certain amount of banking of any large surplus.

The EU’s apparent intention to (just about) keep on a track towards its 2050 targets is surely welcome.  However the proposed 2030 target for the EUETS thus does not seem very demanding.  It seems unlikely that such a cap will be to be taken by other countries as a sign of strong EU leadership on emissions reduction.  It also seems unlikely that the EUETS alone will become effective at stimulating large scale investment in low carbon technologies over the next decade and a half.  This risks endangering progress to reduce emissions after 2030.  Additional policy instruments will likely be needed if the EU is to succeed in building the low carbon infrastructure needed to put itself on a path to largely decarbonising its economy by the middle of the century.

Adam Whitmore  -  14th February 2014

Notes on data and assumptions  

The 40% target requires a 20% point reduction by 2030 from the already mandated 20% cut due by 2020.  If this were followed by 40% points (40% down to 80%) over the subsequent two decades an 80% cut would be achieved by 2050.   20% of 1990 levels per decade thus takes the cap towards the top end of the 2050 target range of an 80-95% cut by 2050.

2012 emissions include the industrial emissions additionally covered in Phase 3.  Emissions from large industry are assumed to remain constant over the period.  The linear reduction factor is assumed to increase from 1.74% p.a. to 2.2% p.a. in 2021.

The estimates of power sector trends are based on the IEA 2013 World Energy Outlook New Policies Scenario.  This scenario shows demand growth in EU power generation of 0.4% p.a. over the period, leading to an additional 260TWh of generation by 2030 compared with 2011.  It also shows a decline of 10% in nuclear, but his may include optimistic assumptions about new build.  A decrease in nuclear generation of 20% (180 TWh p.a.) seems plausible, and I’ve used this estimate.  This leads to potential additional demand from fossil generation of 440TWh (260TWh + 180TWh).  The IEA estimates that generation from renewables, including hydro, will approximately double between 2011 and 2030, increasing by 730TWh p.a..  This leads to a net reduction in demand for fossil generation of around 290TWh (730TWh – 440TWh) by 2030.  The estimate of the saving takes account of the profile of these trends, for example the more rapid fall-off in nuclear in the 2020s.  Additional TWh of low carbon power are assumed to reduce emissions by 0.4t/MWh, equivalent to displacing mainly gas. 

The electricity sector projections take their base year as 2011 while the emissions data base year is 2012, but this is taken account of in the calculations. 

Internal aviation emissions are currently around 84 mtpa, but the position of aviation within the EU post-2020 is currently unclear.  The calculations assume that international aviation is dealt with under a separate agreement through ICAO, or not at all. 

The calculations exclude any additional reductions if other jurisdictions take action.  Any reductions in the cap due to international action may in any case be accompanied by increased use of offsets within the EU.

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