EU Emission Trade System

What will the EU Emission Trade System bring us?

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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.

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EU Emission Trade System

What will the EU Emission Trade System bring us?