The European Union remains a benchmark in the regulation of greenhouse gas emissions, but its approach, less flexible than others, could slow down the integration of markets. This is one of the findings of the report published on Friday 25 July by the European University Institute’s Collaborative Observatory for the Assessment of the EU Emissions Trading System, LIFE COASE.
The study lists 38 Emissions Trading Systems (ETSs) worldwide in 2024, covering 19% of global emissions and generating $70 billion.
According to LIFE COASE, the European system, the EU ETS, which was set up twenty years ago, remains the most developed from both a regulatory and economic point of view.
The EU ETS “underwent significant reforms in 2024 to align with the EU’s enhanced climate ambitions”, as the report notes - since last year it has covered maritime emissions and a second system, ‘ETS 2’, will be launched in 2027 for buildings and transport (see EUROPE 13164/13) - the European system is based on a fixed emissions cap, reduced each year.
However, over 55% of the emissions covered by ETSs worldwide are intensity-based caps, i.e. caps that are based on relative targets, such as emissions per unit of output, rather than a fixed volume.
These systems, which are used in China and India in particular, respond to a demand for economic flexibility.
However, even when no legal rule prohibits it, intensity-based cap systems limit integration into other markets such as the EU ETS, because the volume of emissions is uncertain and cannot be anticipated.
Furthermore, the use of offset credits to enable companies to finance emission reduction projects elsewhere in order to meet all or part of their obligations has been banned in the EU since 2021, but is permitted in certain countries such as China (up to 5% of compliance obligations), Canada, Indonesia and South Korea.
The most likely opportunities for linkages are in technically aligned North American markets, such as California, Quebec and Washington State.
To read the report: https://aeur.eu/f/i19 (Original version in French by Nithya Paquiry)