ISSN 1977-8449 EEA Report No 14/2018 Trends and projections in the EU ETS in 2018 The EU Emissions Trading System in numbersEEA Report No 14/2018 Trends and projections in the EU ETS in 2018 The EU Emissions Trading System in numbersEuropean Environment Agency Kongens Nytorv 6 1050 Copenhagen K Denmark Tel. 45 33 36 71 00 Web eea.europa.eu, eea.europa.eu/themes/climate Enquiries eea.europa.eu/enquiries Cover design EEA Cover photo Andrzej Bochenski, ImaginAIR/EEA Legal notice The contents of this publication do not necessarily reflect the official opinions of the European Commission or other institutions of the European Union. Neither the European Environment Agency nor any person or company acting on behalf of the Agency is responsible for the use that may be made of the ination contained in this report. Copyright notice European Environment Agency, 2018 Reproduction in authorised provided the source is acknowledged. More ination on the European Union is available on the Internet http//europa.eu Luxembourg Publications Office of the European Union, 2018 ISBN 978-92-9480-003-9 ISSN 1977-8449 doi 10.2800/542773Authors and acknowledgements 4 cutive summary 5 1 Recent trends . 8 1.1 Stationary installations . 8 1.2 Aviation 17 2 Long-term trends . 20 2.1 Stationary installations .21 2.2 Aviation 35 3 Projected trends 39 3.1 Stationary installations .39 3.2 Aviation 43 References . 44 Annex 1 Background ination and data 48 A1.1 Activities covered by the EU ETS 48 A1.2 Allocation of free allowances .48 A1.3 Auctioned allowances during the third trading period 50 A1.4 and assumptions to project the balance of allowances until 2030.50 3 Contents Trends and projections in the EU ETS in 2018 ContentsTrends and projections in the EU ETS in 2018 4 Authors and acknowledgements Authors and acknowledgements This report was prepared by the European Environment Agency EEA and its European Topic Centre for Air Pollution and Climate Change Mitigation ETC/ACM. The ETC/ACM is a consortium of European institutes assisting the EEA in its support to European Union EU policy in the field of air pollution and climate change mitigation. The authors were Sean Healy, Verena Graichen, Johanna Cludius and Sabine Gores, ko-Institut, Germany a partner of the ETC/ACM. The EEA project managers were Stephanie Schilling and Franois Dejean.5 cutive summary Trends and projections in the EU ETS in 2018 About this report This 2018 report of the European Environment Agency EEA provides an analysis of past, present and future emissions trends under the European Union EU Emissions Trading System ETS, based on the latest data and ination available from the European Commission 1 and Member States 2 . The report also analyses the balance between supply and demand of allowances in the market. Main findings In 2017, the surplus of EU ETS allowances declined for the third consecutive year. The EU ETS is a cap and trade system, whereby a cap i.e. a determined quantity of emission allowances is set on the emissions from the installations covered by the system. The cap decreases gradually in order to achieve emission reductions over time. Installations can trade emission allowances with one another, which ensures that emission reductions take place where it costs least. Between 2009 and 2012, the number of available allowances exceeded the demand for allowances related to total emissions in the EU ETS. A surplus of allowances accumulated during this period, which resulted in lower prices for emission allowances and limited the incentive to invest in clean, low-carbon technologies Figure ES.1. This ran, in particular, the risk of a carbon lock-in, with firms investing in carbon intensive technologies that could make the achievement of emission reductions more challenging in the longer term. cutive summary 1 Data on verified emissions and compliance by operators under the EU ETS for the years up until 2017 are based on an extract of the EU Transaction Log from 10 July 2018. 2 Projections of EU ETS emissions until 2030, reported in 2017 under the EU Monitoring Mechanism Regulation. 3 Article 3a of the EU ETS Directive EU, 2003 defines the emission allowance as being an allowance to emit one tonne of carbon dioxide equivalent during a specified period, which shall be valid only for the purposes of meeting the requirements of this Directive and shall be transferable in accordance with the provisions of this Directive. In response to this situation, a number of allowances originally planned to be allocated through auctioning between 2014 and 2016 corresponding to 900 million allowances in total were not allocated. As a result of this so-called backloading measure, the cumulative surplus of allowances has declined considerably. In 2017, the overall surplus of allowances continued to decline for the third consecutive year. It is now around 1.6 billion allowances EC, 2018d. Despite an increase in auctioning volumes compared with 2016 due to the end of the backloading measure, the overall supply of allowances in the EU ETS remained lower than the overall annual demand. This was due to a 0.2 increase in total verified emissions driven primarily by industrial growth, combined with lower volumes of allowances being allocated free reflecting the planned annual reduction of the ETS cap and the limited use of international offsets that installations can use for compliance. The surplus of allowances remains substantial. To ensure the orderly functioning of the market and address the structural supply-demand imbalance, the Market Stability Reserve MSR will start operation in 2019. The MSR will function based on a set of pre-determined rules that place into a reserve a proportion of the total allowances in the carbon market when the number of allowances is above a certain threshold in order to reduce the surplus over time. The MSR is also expected to make the EU ETS more resilient to future unanticipated shocks. Following the agreement on the revision of the EU ETS Directive, which enhances the ambition of the MSR EU, 2018a, the price of EU allowances EUAs increased by over 10 in 2017 3 . The EUA price has continued to rise in 2018, reaching approximately EUR 20 per unit at the start of September.cutive summary 6 Trends and projections in the EU ETS in 2018 Figure ES.1 Emissions, allowances, surplus and prices in the EU ETS, 2005-2017 Cumulative surplus Supply of allowances Verified emissions Million emission units/MtCO 2 e EUA price EUR/tCO 2 e 0 5 10 15 20 25 30 0 500 1 000 1 500 2 000 2 500 3 000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 First trading period Second trading period Third trading period Note The cumulative surplus represents the difference between allowances allocated for free, auctioned or sold plus international credits surrendered or exchanged from 2008 to date minus the cumulative emissions. It also accounts for net demand from aviation during the same time period. Refer to the 2017 report for further ination EEA, 2017b.MtCO 2 e, Million tonnes of CO 2equivalent; tCO 2 e, Tonnes of CO 2equivalent. Sources Point Carbon, 2012; EEA, 2018; EEX, 2018; ICE, 2018.cutive summary 7 Trends and projections in the EU ETS in 2018 4 The emission reduction between 2005 and 2017 is estimated based on the current scope of the EU ETS in the third trading period EEA, 2018. Over halfway through the third trading period, power generation continues to drive emission reductions in the EU ETS. Emissions trends for industrial installations have been more variable, reflecting the economic developments observed in Europe over the last three trading periods. Aviation emissions continue to grow year on year. Between 2005 and 2017, emissions from stationary installations declined by 26 . By 2014, emissions were already lower than the cap set for 2020 4 . This reduction was largely the result of changes in the mix of fuels used to produce heat and electricity, in particular less use of hard coal and lignite fuels, and an increase in electricity generation from renewables, which almost doubled over the period 2005-2017. For industrial installations outside the energy sector, the emission reductions observed since the start of the second trading period are primarily due to lower levels of output following the economic recession in 2008. Other factors, such as improvements in energy efficiency and the increased use of biomass and waste as energy sources in production, may have further contributed to lower emission levels. Emissions and production volumes were relatively flat at the beginning of the third trading period, but over the previous 2 years emissions have started to increase as economic conditions have improved and output has begun to rise. Since aviation was included in the EU ETS, emissions from this sector have continued to increase year on year throughout the third trading period. This primarily reflects the increasing demand for air travel. Member States project that, with the current measures in place, their EU ETS emissions will continue to decrease, albeit at a slower rate than historically. The overall projected reduction is not yet in line with EU objectives for emission reductions by 2030. According to the projection scenarios reported by EU Member States up until June 2018 under EU legislation, EU ETS stationary emissions are projected to continue decreasing, with existing measures WEM in place, by 8.7 between 2015 and 2020, and by a further 6.4 between 2020 and 2030. Based on these projections, and on the agreed rules governing the MSR, the EEA estimates that the current surplus of allowances will quickly reduce in the coming years. As EU ETS emissions are projected to be higher than the cap from 2025 onwards, based on the WEM scenario, the demand for allowances will contribute to further reducing the number of allowances in circulation in the carbon market.Trends and projections in the EU ETS in 2018 8 Recent trends This chapter presents developments for stationary installations and aviation separately, focusing first on emission trends in the past year and second on the implications for the supply and demand of allowances. Given that aircraft operators can purchase allowances from stationary installations, there is a degree of interaction between stationary installations and aviation, which is discussed throughout the chapter. 1.1 Stationary installations 1.1.1 Emission trends Status in 2016 In 2017, the greenhouse gas emissions covered by the EU ETS accounted for around 40 of 1 Recent trends Between 2016 and 2017, the total European Union EU Emissions Trading System ETS emissions for stationary installations increased by about 0.2 . Emissions from combustion installations mainly power plants continued to decline, which partly reflects the phasing out of coal use in several Member States. In contrast, emissions from industrial installations grew by an average of 1.1 5 , primarily due to increased production output. The supply of EU allowances EUAs increased by 9.4 in 2017, compared with the previous year, following the end of the backloading measure, despite the decline in the number of free EUAs allocated and in the use of international credit offsets. Most power plants had to buy their EUAs in 2017, while industrial installations, deemed to be exposed to a risk of carbon leakage i.e. the increase of emissions outside of the EU because production is relocated to places where there are no or lower carbon costs than in the EU, received EUAs for free. For the majority of industrial sectors, verified emissions were higher than the number of allowances received for free in 2017. This was due to increased emission levels, driven by economic growth and the continuous reduction of free allocation. Emissions from the aviation sector increased by 4.5 in 2017, compared with the previous year, as the number of passengers continued to grow for many operators. The number of allocated EU aviation allowances EUAAs in 2017 was smaller than the emissions from the aviation sector. Aircraft operators therefore had to purchase EUAs from the stationary sector to comply with their emissions cap, set separately from the EU ETS cap for stationary installations. For the third year in succession, the overall annual demand for EUAs in 2017 was higher than the supply of EUAs. This led to a further reduction in the cumulative surplus, which is now around 1.6 billion allowances EC, 2018d. At the same time, EUA prices increased by 9.8 in 2016/2017. 5 This is the average increase by ETS activity codes 21-99, which cover specific industries, and does not include the industrial installations without specific ETS activity, which are covered under combustion ETS activity code 20.Recent trends 9 Trends and projections in the EU ETS in 2018 the total greenhouse gas emissions of the EU. Combustion installations 6 are the main source of EU ETS emissions, emitting 1 163 MtCO 2 e 7 in 2017 Figure 1.1, 66 of the total verified emissions. Overall emissions in the EU ETS rose by 0.2 in 2017 compared with last year. Although emissions from the combustion sector declined by 0.3 , emissions from the industrial sector increased by 1.1 Figure 1.2. The overall increase in industrial emissions in 2017 6 Combustion installations refers to those involving any oxidation of fuels, regardless of the way in which heat, electricity or mechanical energy produced by this process is used, and any other directly associated activities, including waste gas scrubbing EC, 2010. 7 MtCO 2 e refers to million tonnes of carbon dioxide equivalent. 8 The verified emissions for iron and steel, coke and metal ore are based on the ETS activity classifications. In some cases, installations using waste gases from the production of iron and steel e.g. blast furnace gas are classified as ETS activity combustion. 9 Manufacturing is reported under code C of NACE rev. 2, the statistical classification of economic activities in the European Community. The increase in production output for manufacturing in 2017 for the EU-28 is calculated based on the annual average of the monthly index values for both 2016 and 2017. 1 163 152 127 152 79 36 28 17 0 200 400 600 800 1 000 1 200 1 400 MtCO 2 e Combustion Cement and lime Re fineries Iron and steel, coke, metal ore Chemicals Other non-metallic minerals Pulp and paper Other metals incl. aluminium Figure 1.1 EU ETS emissions by main activity type in 2017 Note The emissions cover all 31 countries that currently participate in the EU ETS. EU Transaction Log EUTL activity codes have been aggregated for certain sectors throughout the report refer to Table A1.1. Source EEA, 2018. Emissions from iron and steel installations accounted for 152 MtCO 2 e i