EU ETS emissions to fall at least 14pc in 2020: Sandbag

Greenhouse gas (GHG) emissions from stationary installations covered by the EU emissions trading system (ETS) will end this year down by at least 14pc on the year, and more than a quarter below the system's supply cap, environmental think tank Sandbag said this week.

In an analysis of the effect of the Covid-19 pandemic on EU ETS emissions published this week, Sandbag examined two scenarios. Both assume that initial lockdown measures in Europe will be lifted from 15 May, but the second maps out how emissions will be affected if there is a second ‘wave' of the pandemic and another lockdown, imposed from 15 September until the end of this year.

Under its first scenario, the think tank estimates that GHG emissions covered by the EU ETS, excluding the aviation sector, will end the year at 1.3bn t CO2 equivalent (CO2e), while under the second scenario this falls to 1.2bn t CO2e. This represents a drop in emissions of about 14pc and 19pc, respectively, on the year, based on the most recent EU data on 2019 ETS emissions published earlier this month.

The report's modelling assumes a 30pc monthly reduction in industrial emissions and a 12pc fall in power-sector emissions owing to the pandemic, both of which the think tank expects to recover gradually in the six months following lockdown. It also assumes a further 10pc drop in power-sector emissions owing to lower coal burn driven by unrelated factors.

Social distancing measures introduced across Europe in a bid to slow the spread of the coronavirus have resulted in lower industrial activity, which in turn has caused a significant drop in heat and power demand and reduced GHG emissions in the region.

And market factors are increasingly pushing the more carbon-intensive coal-fired plants out of European power generation mixes independent of the pandemic, as installed renewable capacity increases and low gas prices encourage coal-to-gas switching.

EUA surplus

Sandbag's estimated emissions for this year would leave them about 27pc below the EU ETS supply cap under the first scenario, and 31pc below in the second, the think tank said. The cap stands at about 1.8bn t of CO2e at present.

According to Sandbag's calculations, this leaves 1.34bn of excess ETS allowances (EUAs) not absorbed by the market stability reserve (MSR) this year — and therefore remaining in circulation — under the first scenario, and 1.43bn under the second scenario, up from about 1.25bn in last year.

This supply-demand imbalance could pose a problem for the EUA market if prices are pushed down as a result. Sandbag is therefore calling for the MSR's rate of absorption to be examined in its upcoming review, as well as for the supply cap to be reduced, to avoid market oversupply in the EU ETS' fourth trading phase (2021-30).

"The MSR review in 2021 has to look at the appropriateness of the current thresholds to cope with the giant historical surplus the ETS will inherit for phase 4", the think tank said.

"There was already a pressing need to adjust the EU ETS cap to real emission levels and to the Paris agreement before the pandemic began. Following the lockdown, this becomes an urgent necessity, without which phase 4 is doomed to be shadowed by an immense oversupply of two years' worth of 2019 emissions equivalent."

Sandbag had already warned that the supply cap would need to be lowered, having told Argus earlier this month that the EU should use the UK's impending departure from the EU ETS at the end of this year as an opportunity to "reset" the cap at GHG emissions levels and align it with the bloc's likely goal of reaching net zero emissions by 2050.

By Victoria Hatherick

Total emissions by activity t CO2e

Average German power sector lignite, coal burn GW