Exit on – 40%. The European Union is now targeting a 55% reduction in its greenhouse gas (GHG) emissions by 2030 compared to 1990. But raising its climate target is one thing. It remains to determine the path to reach it.
With this in mind, the European Commission has presented its “Fit for 55”, a package of twelve legislative proposals for 2023, which the 27 Member States will now look into. With a strong focus: that of strengthening the existing European carbon market and creating a second, for road transport and heating of buildings. A proposal which already crystallizes the oppositions. 20 minutes make the point.
How does a carbon market work?
“States can play on two main families of instruments to reduce greenhouse gas emissions”, begins the economist Christian from Perthuis, founder of the
University Chair in Climate Economics Paris Dauphine-PSL. The first is to establish standards. Typically the ban on the sale of new thermal vehicles in 2035. “The second is to play on carbon pricing, that is to say to give a price to CO2,” continues the economist. We can do this by introducing a carbon tax [qu’on ne présente plus en France] or by setting up a
quota trading system “. What is called a carbon market.
The authority that sets up such a system begins by setting a ceiling for emission quotas for the economic sectors it targets. It then distributes them to the economic players concerned, either free of charge or by auction (see box). Once this framework is in place, companies that emit less than their ceiling can resell this surplus, and those in the opposite situation buy it. Another crucial point: “the quota ceiling is set with an annual rate of decline,” insists Christian de Perthuis. The aim is that they become increasingly rare and therefore more and more expensive, so that companies have more interests in reducing their emissions than in buying rights to pollute. “
Has the European carbon market had the desired effects?
It was born on January 1, 2005 and remains the largest in the world to this day. It covers industrial sectors that are large consumers of fossil energy (iron and steel, cement, paper, fertilizers) and electricity production. “That is all the same 11,000 fixed installations, which at the start represented 40% of European GHG emissions”, slips Christian de Perthuis. In 2012, commercial civil aviation was added, “but only on intra-European flights”, recalls the economist.
Of course, GHG emissions from industry and electricity production fell by 33% in Europe between 2005 and 2019. But the Climate Action Network (RAC), federation of climate NGOs,
speaks of a fall “in trompe-l’oeil”. “Heavy industry emissions have stagnated since 2012,” he points out. The decrease therefore mainly concerned electricity and is explained above all by the gradual rise in renewable energies and the coal exit trajectory in 14 EU states. ”
The European carbon market would therefore have had a modest role. “Emissions quotas have been set according to European climate objectives [– 20 % d’ici à 2020 par rapport à 1990, puis, jusqu’à peu encore,
– 40 % d’ici à 2030], explains Christian de Perthuis. These caps were too lightly restrictive, so that too many allowances were distributed, pulling the price per tonne of CO2 down. “It was under 10 euros between 2012 and 2018, before increasing very recently to reach 56 euros last May.
What does the EU foresee in its “Fit for 55” to strengthen this first carbon market?
It would already be a question of widening this first market by including maritime transport, for the moment covered by no regulation. “Above all, the Commission plans in the future to double the rate of decrease in the quota ceiling”, indicates Christian de Perthuit. 4.2% per year, compared to 2.2% currently. “A very important point, since this drop will increase the price per tonne of CO2,” he continues. Until what point ? The economist recommends reaching 100 euros by 2030, “a threshold beyond which an industrialist has every interest in equipping his factories with CO2 capture and storage systems, or from which the production of green hydrogen becomes profitable ”.
The RAC calls for an even more proactive policy. “Already by establishing a floor price below which a tonne of CO2 could no longer fall, to protect itself from future downward fluctuations,” explains Samuel Leré, head of advocacy at the Nicolas Hulot Foundation (FNH), member of the RAC. It does not exist today, we propose to fix it at 40 euros. The RAC also estimates at 180 euros per tonne of CO2 the price which will have to be reached in 2030 to achieve climate objectives in industry and energy. Supportable by manufacturers? “The objective is not so much to make their production processes more expensive, but to ensure that going without fossil fuels becomes the only possible option because we will have to get out of it,” insists Samuel Leré.
Is creating a new carbon market for road transport and heating a good idea?
The announcement of this second market, which would see the light of day in 2025, made EU states jump, waving the specter of new “yellow vests” movements. “We are reserved and far from being the only ones, we confirm this Friday morning in the entourage of the Prime Minister. We are particularly attentive to the social consequences of such a proposal and still have doubts about its effectiveness. “
The RAC also ranks the measure among bad ideas, “even if households will also have to do without fossil fuels in the long term,” concedes Samuel Leré. “But this new carbon market would directly affect individuals, who will pay this price for CO2 by going to the pump or heating with fuel oil or fossil gas,” he continues. The most modest households or those who do not have access to low-carbon alternatives will be hit hard. “
To avoid this, the European Commission proposes to create a social climate fund, endowed with 72 billion euros over seven years, which would go to the energy transition of the most vulnerable households. “But there is a strong unpredictability and a strong fluctuation in the price of CO2 on the market, which could quickly make this fund obsolete,” replies Samuel Leré. For these sectors (road transport and heating), he recommends going through standards, “what would have
could do much more with the Climate Law in France. “
Christian de Perthuis, for his part, welcomes the introduction of a CO2 price on heating and road transport. “This mechanism can very well go hand in hand with the establishment of standards to accelerate the transition, as long as we financially support the most modest,” he pleads. The issue was the same with the carbon tax, but since the “yellow vests”, carbon pricing issues have become taboo. “The economist invites in any case not to be mistaken:” When you place industrialists and electricity producers under a quota system, households also end up paying. Simply, we realize less. “
Distribute allowances to companies for free or auction them?
Another explanation for the relative failure of the first European carbon market is the way in which quotas were allocated to companies. They can either be distributed for free or be auctioned.
“Brussels expected that from 2013, auctioning would gradually become the basic rule,” continues Christian de Perthuis. In fact, apart from electricity, distribution has remained free in most sectors. The stated aim was to protect European industry from a potential loss of competitiveness and to avoid “carbon leaks”, ie the relocation of industrial sites to foreign countries. But these free allowances do not help add value to the tonne of carbon.
In its package of measures unveiled on July 14, the European Commission proposes a new system by circumventing this risk of “carbon leaks” by setting up a carbon adjustment mechanism at the borders. Clearly, imports of goods produced outside the EU, in sectors covered by the carbon market, will have to pay this tax in an amount equivalent to the current price per tonne of CO2. One way to put everyone on an equal footing.
This adjustment will be gradually implemented between 2026 and 2036 and will be correlated with a decrease in the share of allowances distributed free of charge, specifies The echoes. A point on which the Climate Action Network will be vigilant. “Border adjustment and the distribution of free quotas cannot coexist,” insists Simon Leré. Or else, we are no longer in a climate measure, but in economic protectionism. “