EU carbon market continues to deliver emission reductions

The EU ETS puts a cap on greenhouse gas emissions from power and energy-intensive sectors of industry and aviation operating in Europe. This is about 36% of all EU greenhouse gas emissions. The cap decreases every year to reduce emissions in line with the EU climate targets. The report also captures key outcomes of the 2023 EU ETS revision in the context of the European Green Deal, which aligns the system with the EU’s target of at least 55% emission reductions by 2030 below 1990 levels.

To date, the EU ETS had helped bring down emissions from power and industry sectors to 37.3% below 2005 levels. External events such as first the COVID-19 pandemic and lately, energy crisis in 2022, put some strain on emissions reduction. Emissions from installations (power generation and heavy industry) decreased slightly, marked by an increased use of coal for electricity and heat generation due to security of supply needs, higher prices of natural gas and a reduced manufacturing output due to higher fuel and energy prices. In the aviation sector, emissions rebounded from an all-time drop in 2020 due to the pandemic.

Despite these temporary disruptions, the EU ETS worked effectively in 2022. Overall, emissions from installations (power plant and heavy industry) remained 7% below pre-pandemic-2019 levels. Auctions of allowances continued as planned. Except for a short-term dip coinciding with the start of Russia’s full-scale invasion of Ukraine, the carbon price signal remained robust, leading to nearly EUR 39 billion being raised in ETS auction revenue, distributed mainly to Member States’ budgets. This puts total revenue raised by the ETS at EUR 152 billion.

Member States used on average 76% of their ETS revenue in 2022 to support climate and energy action, including measures to address the effects of the energy crisis and help people and businesses. A detailed analysis of Member States’ reporting on this spending can be found in the Climate Action Progress Report 2023. In addition, disbursements from the Modernisation Fund have helped advance the modernisation of the energy sector in all beneficiary Member States, and the Innovation Fund has directed nearly EUR 2 billion to new projects in energy and industry transformation.

The report captures how other elements of the ETS framework worked together in 2022 for the EU ETS to deliver in terms of both emission reductions and auction revenue. Market Stability Reserve continued to remove surplus allowances from auctions and began to invalidate allowances in 2023. Market oversight rules ensure that the EU carbon market functions smoothly and the framework for monitoring, reporting and verification of emissions guarantees environmental credibility of the EU ETS.

The EU ETS remains a crucial vehicle for the green transition in Europe. With the 2023 revision, the EU ETS is strengthened to create incentives for far-reaching, long-term decarbonisation and discourage carbon lock-in. With the EU ETS scope extended to the maritime sector from 2024 and the new Emissions Trading System for buildings, road transport and small-emitting industry launching in 2027, carbon pricing will cover three quarters of EU emissions. At the same time, the system will leverage more resources to support people and businesses in the green transition. The Commission will report on the implementation of ETS revision in future reports.

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Carbon Market Report
State of the Energy Union 2023
Climate Action Progress Report 2023