What’s needed to fix the EU’s carbon market

The EU ETS is currently failing to promote low-carbon solutions due to a carbon price that has plunged to around 5 euros per tonne of CO2, driven by a surplus of 2.1 billion tonnes of CO2-equivalent allowances. This oversupply is attributed to weak emission targets, the inflow of international offsets, and reduced demand following the economic crisis. The document warns that this surplus allows the EU to transform current emission reductions from other policies into 'future rights to pollute', potentially reducing the domestic impact of the 2030 climate target from 40% to 34%. To fix the market, the author recommends increasing the linear reduction factor to 2.6%, permanently cancelling 1.6 billion excess allowances, enacting the Market Stability Reserve by 2017, and transitioning to full auctioning for all industrial sectors post-2020 to eliminate windfall profits and adhere to the polluter-pays principle.

• The EU ETS is suffering from a significant oversupply of carbon permits, totaling 2.1 billion tonnes of CO2-equivalent, which is projected to grow to 2.6 billion by 2020. This surplus has caused the carbon price to collapse from nearly 30 euros per tonne in 2008 to approximately 5 euros, a level too low to incentivize investments in renewable energy or efficient technologies.
• The use of international offsets threatens the domestic integrity of the EU's 2030 target to reduce emissions by 40%. Because offset credits converted into allowances can be banked, the 1.6 billion offsets accumulated by 2020 could result in the 2030 target representing only a 34% domestic emission reduction.
• The proposed Market Stability Reserve (MSR) is viewed as insufficient because it does not provide a structural solution for the long-term overhang of over two billion permits, as it returns surplus allowances to the market over time rather than removing them.
• To align the EU ETS with the 2050 objective of reducing emissions by 80-95%, the linear reduction factor (LRF) should be increased to 2.6% from 2021. The current LRF of 1.74% is insufficient and would only lead to 73% reductions by 2050 compared to 2005 levels.
• Current carbon leakage rules, which provide 100% free allowances to sectors deemed at risk, have led to massive windfall profits for industry. For example, between 2008 and 2011, the steel sector accumulated a surplus of over 300 million allowances, with ArcelorMittal alone receiving 123 million free surplus allowances valued at approximately 1.6 billion euros.
• The document recommends a transition to full auctioning for all industrial sectors after 2020 to implement the polluter-pays principle and the creation of an EU climate fund, financed by auctioning revenues, to support breakthrough industrial technologies in sectors like steel, cement, chemicals, and paper.

APA

Carbon Market Watch (2014). What’s needed to fix the EU’s carbon market. https://carbonmarketwatch.org/wp-content/uploads/2014/07/ETS-POLICY-BRIEF-JULY-2014_final_1.pdf

Chicago

Carbon Market Watch. What’s needed to fix the EU’s carbon market. 2014. https://carbonmarketwatch.org/wp-content/uploads/2014/07/ETS-POLICY-BRIEF-JULY-2014_final_1.pdf.

Wikipedia

{{cite report |author=Carbon Market Watch |title=What’s needed to fix the EU’s carbon market |date=July 2014 |url=https://carbonmarketwatch.org/wp-content/uploads/2014/07/ETS-POLICY-BRIEF-JULY-2014_final_1.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{carbonmarketwatch2014whats, author = {{Carbon Market Watch}}, title = {{What’s needed to fix the EU’s carbon market}}, institution = {Carbon Market Watch}, year = {2014}, month = jul, url = {https://carbonmarketwatch.org/wp-content/uploads/2014/07/ETS-POLICY-BRIEF-JULY-2014_final_1.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }