2021: a carbon markets odyssey

While the European Commission’s proposal for a revised EU Emissions Trading System (ETS) directive includes positive measures, such as an increase in the Linear Reduction Factor and the inclusion of the maritime sector, it fails to address in a timely fashion the enormous surplus of allowances in the system. This means that the cap will de facto remain meaningless for a number of years to come. In addition, the proposal to offset all remaining emissions after 2035 – as foreseen under the revision of the land use, landuse change and forestry (LULUCF) regulation – could further weaken – or even simply kill – the EU ETS past 2035.
The draft review also fails to address the lack of a stable and robust price signal, in particular by continuing to allocate free allowances for another 14 years and by failing to limit excess volatility in the price of carbon.
Overall, while the draft review adjusts the ETS theoretical trajectory to the new 55 goal, it fails to fix the cap and the price signal – the two mechanisms through which the EU ETS can deliver on its climate objectives. As a result, the EU ETS will most likely once again fail to make a significant contribution to curbing EU emissions.
Lastly, the greater role foreseen for carbon offsetting and the temporary sequestration of carbon in soils and trees is another major concern: from a proposal to create new business models based on carbon removal via soils and trees, to the decision to continue to offset international flight emissions instead of curbing them, to a proposal to offset all remaining EU emissions past 2035, it is puzzling to see the increased importance given to carbon sequestration in trees, in a year when forests around the world are burning
or turning from sink to source.

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