Allowing the use of international carbon credits or carbon removals for compliance under the EU emissions trading system (ETS) risks undermining the environmental integrity of the scheme and hindering the bloc's achievement of its climate targets, warned a study by research body the Oeko-Institut published today.
Under the three scenarios examined in the study, which was commissioned by non-governmental organisation Carbon Market Watch, the EU ETS's supply-demand balance does not need to be artificially adjusted before 2035. But beyond this date the total number of allowances in circulation could fall below zero, meaning sectors under the scheme would either need to be fully decarbonised by this date or shut down unless flexibility is introduced to the system.
Any reforms to increase ETS supply should focus on the system's market stability reserve, the study found, a mechanism which absorbs a percentage of excess supply from circulation each year but can also release permits if supply falls too low.
Changes to the scheme's linear reduction factor — the amount by which its supply cap falls annually — would achieve the same thing but risk weakening the system's ambition, and is more likely to be politically challenging, the study said.
Some EU member states have expressed interest in allowing the use of international carbon credits issued under Article 6 of the Paris climate agreement for ETS compliance for this purpose, and the European Commission said last week it is taking the option into consideration, although any such use would entail only "very high integrity" credits representing a "very small proportion" of the bloc's climate action.
But introducing Article 6 credits to the ETS "poses significant risks to the functioning and environmental integrity of the system", the study found, pointing to the past use of Clean Development Mechanism credits to offset some ETS obligations to which it attributed the "collapse" of the carbon price.
Including carbon removals in the scheme would pose a similar risk, the study found, concluding it is "crucial" they remain in a separate framework. The European Commission is expected to publish a report next year examining their potential inclusion.
The commission will also assess in 2031 the feasibility of linking the existing ETS to the EU ETS 2 for road transport and buildings, scheduled for launch in 2027, which could increase the liquidity of the two schemes. But such a link "cannot ease tension in the [ETS] market with certainty, and administrative barriers to the merger are high", the study warned.
