EU ETS: Increase of Cap Reduction Factor up to 2030 necessary

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Increasing ambition in EU ETS can help to fulfil EU’s international climate policy commitments.
Source: juergenmfoto /

Minimizing cumulative emissions is essential for reducing the risk of overshooting the warming limit of 1.5 degrees. This study commissioned by the German Environment Agency analyses the implications for the EU ETS and presents different scenarios for this goal. The authors conclude that the cap reduction factor should be increased to 4 percent starting from 2021 or 5.8 percent starting from 2026.

How to derive an emissions budget for EU ETS that is compatible with the Paris Agreement? 

According to the IPCC SR 1.5, to limit warming to 1.5 degrees with a probability of at least 66 percent, a global budget of 420 to 570 Gt CO2 remains – before accounting for other GHG gases and depending on which method is used. However, for a variety of reasons there are large uncertainties associated with the budget. Therefore, the budget could also be substantially smaller. In addition, a fair distribution of this global budget between countries is a highly political and contentious issue. There are multiple approaches, each with their strengths and weaknesses. Thus, deriving an emissions budget that is compatible with the Paris Agreement for a group of countries such as the EU or for EU ETS sectors is a challenge and will always be subject to reasonable criticism. Despite this, orientation is required to derive an EU-ETS budget that may be regarded as compatible with the Paris Agreement and translate it into a cap reduction path.

A cost-effective emissions budget for EU ETS as very upper limit

The authors assess global long-term pathways to stay within the remaining emissions budget for limiting global warming to 1.5 degrees with a 50 – 66 percent probability and distribute it globally based on cost-effectiveness criteria. They calculate that an emission budget of approximately 30 Gt CO2e for the EU ETS during the period from 2016 to 2050 remains, while achieving net-zero emissions in 2050 at the latest. The authors underline that this should not be taken as recommendation for an EU share of the global budget, but purely be interpreted as an indicator for the very upper limit of an EU budget compatible with keeping global warming below 1.5 degrees, as the cost-effectiveness approach is most favourable to developed economies and does not reflect a “fair share” of the budget. 

With current emission trends and ETS parameters, up to one third of this budget could already be used until 2020, and about 25 Gt CO2e -or more than 80 percent – could be used by 2030.  

Limiting cumulative emissions in ETS sectors to 30 Gt requires substantial increase of the Linear Reduction Factor (LRF) by 2030

The authors analyse four different scenarios for cap reduction pathways that stay within the emission budget of 30 Gt CO2e

  • Continuing with the current LRF of 2.2 percent by 2030 would require drastic and unrealistic action after 2030 to remain within this budget.
  • Aligning the LRF with the stricter targets for renewable energy and energy efficiency from the “Clean Energy Package”, which would be the minimum adjustment to maintain consistency of European climate and energy policy, means to increase the LRF up to 2.9 percent from 2021 onwards. However, this would still require drastic and likely unrealistic additional abatement efforts after 2030. 
  • Taking into account potential additional emission reductions from national coal phase-out policies could entail a further increase of the LRF up to 3.6 percent. 
  • Fully aligning the LRF with the cost-effective emission budget would require an LRF of 4.0 percent between 2021 and 2030. Such a pathway would result in more realistic climate action requirements after 2030 and set the EU ETS on a more credible long-term course.