The latest annual emissions data from the EU gives further proof that well-designed carbon markets are the most effective and lowest-cost way to cut greenhouse gas emissions.
Europe’s Emissions Trading System reported verified emissions for the 2024 compliance year, showing greenhouse gas emissions from stationary installations and aircraft fell by more than 5% last year, a third successive decline.
Preliminary data published by the European Commission showed that, for plants that have reported both 2023 and 2024 results, emissions fell to 972 million tonnes from 1,030 million tonnes in 2023.
Most of the decline was due to a drop in carbon dioxide emissions from the power sector of around 12%. The growth in renewable generation continues to depress fossil fuel output, with gas generation falling 8% and coal-fired power declining 15%, according to the Commission.
Emissions in the world’s leading carbon market dropped from nearly 2 billion tonnes in 2008 to around 1.6 billion tonnes a year during the late 2010s. The introduction of a supply adjustment system – the Market Stability Reserve – which removes surplus allowances from the market each year, triggered a major jump in prices, which topped out at more than €100/tonne in 2023.
Europe is preparing to begin the legislative process to set an emissions target for 2040 for the bloc, which will represent the last big way-station on the path to reaching net zero by 2050.
The Commission has already recommended a 2040 goal of cutting greenhouse gases by 90% compared to 1990 levels, but with high energy prices still representing a challenge for industry and consumers across the region, politicians are considering how to make this target easier – and cheaper – to achieve.
Stakeholders are also considering how to account for residual emissions in the EU ETS once the supply of emissions allowances has fallen to zero, some time after 2040. While industry is investing in zero-carbon technology and power generation, regulators acknowledge that even after emissions allowance supply shrinks to zero, there will still be emissions that need to be covered by EU ETS compliance instruments.
The Role of Carbon Removals
Companies that fail to surrender allowances matching their emissions are subject to fines of more than €100/tonne, and if there are no more compliance instruments available they will be automatically in breach of their obligations.
The current thinking is that certified emissions removals could fit the bill. Emissions removals represent greenhouse gases that are removed from the atmosphere, either being absorbed by new forest growth, improved agricultural methods, or even captured from the air and stored underground.
This net removal of GHGs would offset any remaining emissions from manufacturing or power generation plants ensuring that Europe achieves net zero.
Carbon removal credits are distinct from other carbon credits that represent emissions avoided or emissions reduced compared to a baseline. As our “bathtub analogy” makes clear, avoiding and reducing emissions compared to a business-as-usual baseline only serves to reduce the rate at which greenhouse gases are increasing.
Carbon removal, however, is an important way of removing those greenhouse gases that are already in the atmosphere.
Europe’s emissions trading system has previously allowed the use of carbon credits for compliance. Between 2008 and 2020, companies were allowed to surrender a quota of credits approved by the UNFCCC’s Clean Development Mechanism.
Since CDM credits were cheaper than EU Allowances, companies maximised their use of credits, leading to a significant oversupply of EUAs that persisted until the late 2010s, when the Market Stability Reserve was introduced.
Europe is therefore taking a more cautious approach to the potential use of carbon credits in the future. Limiting the use to just carbon removals would, regulators hope, drive investment into this new technology and potentially generate a price signal that would be more in line with EUA prices than with reduction and avoidance credits.
Europe may also restrict the use of carbon removals more tightly than previously. Other markets, such as California’s cap-and-trade programme, sets a ceiling on credit use of 4% of an installation’s total emissions, and requires that half the credits used come from specific types of projects, or projects in specific locations.
Bringing emission removals into the EU ETS ensures that once the supply of allowances reaches zero, there will still be a way for companies to surrender compliance instruments covering any residual emissions – and cancel out the impact of those emissions.
