Our colleague Leonarda Srdelić recently spoke on the Croatian Radio show "Climate Challenge" about the European Union Emissions Trading System (EU ETS). She discussed which sectors in Croatia receive the most and least free emission allowances and how the revenues from these sales are used.

Srdelić highlighted that global warming is accelerating and significantly impacting all regions, with Europe warming twice as fast as the global average. To limit global warming to a maximum of 1.5°C above pre-industrial levels by the end of the 21st century – a key goal of the Paris Agreement – it's necessary to cut global greenhouse gas emissions by 43% by 2030.

The EU ETS, which operates on a "cap and trade" principle, is the EU's primary tool for achieving these emission reductions. The European Commission sets a cap on the total amount of greenhouse gases that can be emitted, and companies receive or buy allowances that let them emit a certain amount of gases. These allowances can be traded, creating a market for emissions. The number of allowances decreases over time, aiming to reduce overall greenhouse gas emissions.

Many allowances are given for free to sectors at risk of moving their production outside of the EU to avoid costs associated with emissions, a risk known as "carbon leakage". The remaining allowances are sold at auction, and the revenues help fund member states.

The EU ETS covers large facilities with emissions over 20,000 tons of CO2 equivalents and includes all intra-EU flights and flights to Switzerland and the UK. It also covers the maritime sector, with a new target to cut emissions by 62% by 2030 compared to 2005 levels.

Data on emission allowance prices show that numerous reforms and adjustments to the EU ETS have significantly influenced price movements. During the first two trading periods (2005-2012), a large number of allowances were issued, which led to a noticeable reduction in prices. As a result, a Market Stability Mechanism was introduced in the third phase (2013-2020) designed to withdraw excess allowances when necessary and reintroduce a certain number of allowances in the event of specific shocks. The announcement of this reform began affecting the rise in the price of emission allowances towards the end of 2017. In 2024, the prices of emission units averaged about 65 €/tCO₂, and it is projected that they will gradually increase to 150 €/CO2 by 2030.

Srdelić noted that while the EU ETS covers about 40% of total emissions in the Union, the coverage in Croatia is about 30%. This is due to structural differences in the economies, where a significant part of Croatia's emissions comes from non-industrial sectors like transportation, which have been increasing over the years. There's also a notable trend in both Croatia and the EU of decreasing coverage of total emissions by the EU ETS. This trend reflects successful emission reductions within covered sectors, which reduces their share in total emissions. However, emissions from sectors not covered by the EU ETS are not decreasing as quickly or are even increasing. To address this, plans are underway to introduce a new EU ETS II system by 2027 to cover emissions from other industries and sectors not currently included, such as road transport and residential and commercial buildings.