What is the ETS Exactly?
An emissions trading scheme (ETS) is a tool that puts a quantity limit and a price on emissions. Its “currency” is emission units issued by the government. Each unit is like a voucher that allows the holder to emit one tonne of greenhouse gases. The EU ETS follows a “cap-and-trade” approach: the EU sets a cap on how much greenhouse gas pollution can be emitted each year, and companies need to hold European Emission Allowance (EUA) for every tonne of CO2 they emit within one calendar year. They receive or buy these permits – and they can trade them. . .
The price is right?
The European Commission is addressing the CO2 emission challenge in its Green Deal. Although the plan is not final currently, it’s showing the concepts which need to bring the EU to climate neutrality by 2050. As said the extension of the Emission Trading System (ETS) is a critical instrument. Currently the ETS covers emissions from the energy and industry. However, plans are presented to include Transport, Aviation and the Maritime sector into this system too. The ETS trades emission rights between companies and governments. Hence, for every emitted ton of CO2, one need to have one CO2 emission right. The price for one CO2 emission right is currently around €25. The expectation is that this price will increase over the years, since plans are present to decrease the total amount of CO2 emission rights over the years. .
Figure 1 Development of the European CO2 emission rights unit price. Source: Sandbag (2019) . .
Germany as front runner
Germany already agreed on implementing new green laws earlier in 2019. They planned to implement an ETS from 2021 on for multiple sectors including transport. The starting price for one CO2 emission right (one ton CO2) will be €10 in 2021. This price will increase to €35 in 2025. Thereafter a band width of €35 to €60 per right is agreed, but will be renegotiated upon in 2025. Hence, the effective price after 2025 is partly dependent on the emission trade market and partly on new regulations 1. Example . .
A simple example
What if we do a simple calculation on the cost price effect of the ETS. Let’s a assume a Full-Container Load shipment (2 TEU) of 20 tons that needs to be transported from the harbor of Rotterdam to Frankfurt (approx. 500km) with an Euro 6 truck and trailer. This results in an emission of 79 gram CO2 per tonkm (Well-to-wheel)2. For our shipment to Frankfurt, this comes down to 0.79 ton CO2. Using the current unit price for emitting one ton CO2 of €25, this results in an increase of €19.75 in transport cost. Per pallet place (standard pallets) this boils down to approximately €1 extra transport costs on a cost-price of €60/pallet. . .
Will it really impact behavior ?
From our example, we can conclude that the current price for CO2 emission rights is not forcing companies directly to start operating their supply chains in a different way. And as long as enough CO2 emission rights are available, the unit price will not drastically increase. Hence, major impact of the ETS can be expected when the total amount of CO2 emission rights will be reduced year-by-year. Of course, this implies not a lay-back attitude. What can companies do to operate supply chains more sustainable? This we will discuss next time.