EU ETS - Emissions Trading System in the European Union

The European Emissions Trading System is the foundation of the European Union's climate policy, designed to reduce greenhouse gas emissions in an effective way. It was launched in 2005 and has become one of the largest and most effective market mechanisms for climate protection worldwide. The EU ETS operates on the "cap and trade" principle—setting a limit on greenhouse gas emissions for companies and allowing the trading of emission allowances. This model aims to gradually reduce emissions, forcing companies to take pro-ecological actions and invest in innovative technologies that reduce emissions.

Basic principles of the EU ETS

The EU ETS system operates on the market for emission allowances (so-called ETS Allowances). As part of the system, an annual pool of emission allowances is established, which are allocated to companies covered by the system. Companies that do not exceed their allowances can sell the surplus to other entities that have exceeded their emission limits. This system encourages companies to reduce emissions, because the less they emit, the greater the scope for selling allowances and achieving additional revenues. At the same time, companies that fail to meet the required thresholds must bear high costs for purchasing allowances, which discourages exceeding emission limits.

EU ETS objectives

The EU ETS has three main objectives:

• Reduction of greenhouse gas emissions: The system aims to gradually reduce CO2 emissions in the European Union, aligning with the ambitious EU climate protection objectives.
• Promoting pro-ecological innovation: By creating a market for emission allowances, the system encourages companies to implement new technologies that reduce greenhouse gas emissions.
• Enabling the achievement of the European Union's climate goals: The EU ETS is a step toward combating climate change, including achieving carbon neutrality by 2050.

EU ETS legal regulations

The legal provisions governing the EU ETS were introduced in Directive 2003/87/EC, which created the legal framework for the emissions trading system. In 2005-2007, the system mainly covered the energy industry and some sectors, such as steel and cement processing and production. However, with the growing ambitions of the EU in climate protection, the system was expanded, and its rules were reformed.

In 2021, another reform of the EU ETS came into force, aiming for even more significant reductions in emissions. More sectors of the economy were included in the system, and the EU's "Fit for 55" policy for 2030 sets a goal of reducing greenhouse gas emissions by at least 55% compared to 1990 levels.

Since 1 October 2023, a system known as CBAM has been in operation, designed to balance the fees imposed by the EU ETS on European companies on the global market. The EU ETS system obliges European companies to purchase emission allowances, while CBAM imposes fees on importers of products from outside the EU, leveling the playing field and eliminating competitive advantages and the transfer of production to countries with more lenient emission regulations.

EU ETS and industry in Poland

In Poland, the EU ETS has a significant impact on industrial companies, especially those operating in energy-intensive sectors such as power, steel, cement, and chemicals. The system forces companies to take action to reduce carbon dioxide emissions, as a shortage of allowances leads to the need to purchase them on the market, incurring additional costs.

Energy industry

The energy sector is one of the largest CO2 emitters in Poland, which is why the EU ETS has the greatest impact in this area. Year after year, energy companies must reduce emissions by introducing more efficient energy production technologies and investing in renewable energy sources. Despite the ongoing transformation, Poland still relies heavily on coal for energy production, which generates higher costs related to emission allowances, costs that are passed on to the end consumer in the form of increased energy prices.

Heavy industry

Heavy industries, such as steel, cement, and chemical production, also face challenges resulting from the EU ETS. Companies that generate a large amount of emissions must invest in technologies to reduce them. Many companies in Poland are trying to implement carbon capture and storage (CCS) technologies and improve the energy efficiency of their plants.

Advantages of the EU ETS

• Increasing the cost-effectiveness of emission reduction

The "cap and trade" system allows for a flexible approach to emission reduction. Companies that can reduce emissions more cheaply can sell their allowances, while those that have difficulty reducing emissions can buy them. This mechanism promotes the efficient allocation of emission allowances among companies, supporting innovative initiatives and those focused on implementing pro-ecological solutions.

• Motivation for innovation

The EU ETS challenges companies to reduce emissions, motivating them to invest in technologies that lower carbon dioxide emissions. Such investments may include the development of renewable energy sources, increased energy efficiency, or the advancement of CCS technology.

• Transparency and predictability

The EU ETS system is market-based, meaning companies can predict the costs associated with emissions and monitor the market for emission allowances, facilitating investment decisions. Starting in 2034, free emission allowances will cease, meaning all companies will have to pay for their emissions.

Disadvantages of the EU ETS

• High costs for companies

Companies that do not invest in emission-reducing technologies will incur high costs due to the need to purchase emission allowances. For many companies, especially those in energy-intensive sectors, this can be a significant financial burden, which, combined with the economic downturn, may exacerbate financial difficulties.

• Risk of manipulation

Like any market, the emission allowance market is susceptible to manipulation. For example, companies could falsify their greenhouse gas emissions reports to avoid increasingly high allowance fees.

• Limited effectiveness in the long term

Despite reforms to the system, some critics argue that the EU ETS is not ambitious enough in the long term. Some sectors, such as agriculture, are still outside the system, which may weaken its effectiveness. Changes are planned to include other sectors in the system. Additionally, smaller companies will primarily feel the need to purchase allowances, while global giants will still be able to afford high emissions.

"The EU ETS is a tool that both mobilizes companies to adopt pro-ecological innovations and poses significant financial challenges. For Polish companies, especially those from energy-intensive sectors, it can be both a catalyst for development toward sustainable practices and a source of significant burdens. Its effectiveness depends on companies' ability to adapt to new requirements and further reforms that balance climate goals with economic realities." - says Łukasz Feldman, PhD, Financial Director at DB Energy.

Summary

The European Emissions Trading System is the foundation of the European Union's climate policy and has a profound impact on how Polish companies, particularly those in energy-intensive industries, approach the issue of greenhouse gas emissions. The EU ETS presents serious challenges for companies. Polish entrepreneurs must invest in new technologies and improve energy efficiency, not only to reduce emission costs but also to increase competitiveness in the market. From a long-term perspective, success in adapting to the EU ETS requirements can bring benefits not only financial but also in the form of a positive image and greater acceptance in international markets.