Functioning of the European carbon market

On 20 February 2019, the EU Energy and Environment Sub-Committee considered a Report on how well the EU Emissions Trading Scheme (ETS) performed in 2017.

The EU Emissions Trading Scheme (EU ETS), established in 2005, sets a cap is set on the total amount of certain greenhouse gases that can be emitted by installations. This cap is reduced over time so that total emissions fall. Within the cap, companies receive or buy emission allowances. After each year, a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover future need or sell them to another company short of allowances.

The Report finds that emissions from installations increased slightly in 2017 (by 0.18%), which it states was due to a 2.4% growth in GDP, and that emissions from aviation increased by 4.5%. It finds the legislative changes agreed in recent years to reduce the surplus of allowances are starting to have an effect and that “it is widely expected that the surplus will continue to decline substantially in the coming years.” It highlights the more ambitious emissions reductions cap that has been set for aviation and it concludes that the reforms of the EU ETS agreed in 2018 are an important development that will deliver a 43 percent reduction in emissions by 2030.

In relation to the UK, the Report highlights several concerns. The Directive requires that operators of installations covered by the scheme produce an annual report on their emissions but this Report states that the UK only checked 59 per cent of these for completeness. It also states that the UK had to provide estimates for 79 installations because of “newly discovered historic errors” in the data. Members decided to write to the Minister, requesting further details on these two issues.

Update: on 27 March, the Committee considered the Minister’s response. Members did not feel that the Minister provided adequate reassurance that the Government was ensuring compliance with the EU ETS effectively, and so wrote back requesting further details.

Update: on 15 May, the Committee reviewed the Minister’s latest response. They noted her explanation of the steps that are taken to seek to ensure accurate reporting and that, in most cases, the scale of the reporting error was small. They also noted, however, that there appears to have been an increase in the number of errors over the past few years and so Members wrote back to ask whether any action was being taken to address this. 

Update: on 12 June, having received a response from the Minister to all their outstanding queries, the Committee decided to release the Report from scrutiny. 

Letters to the Minister

Letter from the Minister

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