Global emission trading reached a record $63 billion in 2022

Global Emissions Trading Systems (ETS) hit a record high of $63 billion in 2022 as the energy crisis pushed policymakers to strengthen decarbonisation efforts, says a new report by the International Carbon Action Partnership (ICAP).

ETS, also known as cap-and-trade systems, are market-based policies that reduce greenhouse gas emissions. The system aims to create a financial incentive for companies to reduce their emissions by setting a limit, or cap, on the total amount of emissions that can be released within a certain timeframe.

The 10th edition of the ICAP Emissions Trading Worldwide report provides a comprehensive analysis of the latest developments and key trends in the ETS space from the past year.

The report confirms the growing momentum for ETS developments as the number of systems continues to rise. There are now 28 such systems in force, three more than last year, with 20 more under development or consideration across the world, particularly in the Latin American and Asia-Pacific regions.

The report also noted that for the first time, “we see concrete steps towards emissions trading being taken in Africa. The share of global emissions covered by an ETS remains unchanged at 17 percent, as the increase in coverage thanks to the introduction of new systems was offset by the overall reduction in emissions under ETS caps, as is expected from systems designed to reduce emissions.”

Despite the challenging and unprecedented global backdrop, existing systems showcased maturity and proved to be remarkably resilient to significant external shocks. Systems currently in operation have weathered an eventful year without major disruptions. After making significant gains in 2021, prices in most systems started and ended 2022 at around the same levels, despite some fluctuations over the course of the year.

Emissions trading confirmed itself to be a valuable source of revenues as 2022 marked another record, with more than USD 63 billion of actioning proceeds collected in a year. As a result of higher allowance prices and an increasing use of auctioning, more than half of the total revenue raised by ETSs since 2008 was collected in 2021 and 2022, with many governments channeling these resources back into further climate action, subsidising emerging technologies, or supporting lower-income households, the report noted.

The Russian invasion of Ukraine in early 2022 made Europe’s energy dependence painfully clear, just after the EU committed to becoming climate neutral by 2050 and reducing net emissions by 55 percent by 2030, compared to 1990. The war has significantly impacted climate policy.

“Instead of weakening climate ambitions, the energy crisis pushed governments towards ending their fossil fuel dependency quicker, supported by policies like emissions trading,” noted Stefano De Clara, head of the ICAP Secretariat, in an article quoted in the report.

“Emissions trading sends an important price signal to direct investment to decarbonisation and can also, if designed well, ensure an inclusive and just transition by directing help to those communities that need it the most,” Clara said.

The report also said that despite the challenging and unprecedented global backdrop, existing systems showcased maturity and proved remarkably resilient to significant external shocks.

Read also:Addressing mixed messages on climate crisis and energy transition

“The systems currently in operation have weathered an eventful year without major disruptions. After significant gains in 2021, prices in most systems started and ended in 2022 at around the same levels, despite some fluctuations over the year,” it said.

“The observation that allowance prices did not rise in 2022 is worth noting in the context of the ongoing energy crisis and its impacts on consumers, who have experienced significant rises in the consumer price index and its energy component.”

According to ICAP, the Russian invasion of Ukraine in early 2022 made Europe’s energy dependence painfully clear, just after the EU committed to becoming climate neutral by 2050 and reducing net emissions by 55 percent by 2030, compared to 1990. The war has significantly impacted climate policy.

2022 global performance

The report noted that throughout 2022, ETSs across the globe will undergo a series of developments, including policy decisions spurred by rising prices caused by the energy crisis. New systems are also being introduced as jurisdictions work to design and implement ETSs.

In the European Union, the report highlighted that the EU Parliament and Council reached an agreement on a major reform of the EU ETS last December. The EU seeks to strengthen its ambition in order to achieve the EU’s 55 percent emissions reduction target for 2030.

The reform includes a tighter cap for the existing ETS for electricity, industry, and aviation and a phase-in of the maritime sector from 2024 onward. A phase-out of free allocation for some industrial sectors will be accompanied by a phase-in of a carbon border adjustment mechanism from 2026. Moreover, the EU decided to introduce a new EU ETS for buildings, road transport, and processing heat in industry in 2027, or, in case of high energy prices, in 2028.

The UK launched a major consultation on scheme reforms addressing several issues, including how to align the cap trajectory with the country’s net zero target and expand the scheme’s sectoral coverage. An initial response with changes to be implemented from 2023 was published in August, while the full response is expected in 2023.

There were significant developments in the United States of America. For example, in December, the Board of the California Air Resources Board (CARB) adopted the state’s “Final 2022 Scoping Plan”, which establishes the strategy to meet California’s emissions reduction targets. In January 2023, New York’s Climate Action Council issued a “Final 2022 Scoping Plan” that proposes a range of policies and actions to meet the state’s carbon neutrality goal in 2050—including an economy-wide cap-and-invest program. When adopted, the program will cover all emitting sectors under an enforceable and declining cap, with the caps for 2030 and 2050 corresponding to state-wide emission limits. Other states like Oregon, Massachusetts, among others, also made similar commitments.

The government of Chile published its 2022–2026 energy agenda in August. It states that a pilot ETS project for the energy sector will be developed to evaluate the role of this instrument in achieving emissions reductions and a just transition in a cost-effective manner.

Chile shows how carbon pricing policies can be tailored to specific contexts. The country has had a carbon tax in place since 2017. Starting in 2023, entities covered by the tax will be able to comply with their obligations using offsets stemming from sources not regulated by the tax. This new system aims to promote mitigation in other sectors and develop a domestic market for offsets.

Looking ahead, under the banner of the framework law on climate change, the Ministry of Energy is looking into establishing a system of GHG emission caps, similar to a baseline-and-credit system for high-emitting sectors, as well as a cap-and-trade system for the power sector. Both instruments would support a cost-effective transition towards carbon neutrality.

In Nigeria, last August, the Minister of the Environment announced that the country has started activities towards establishing a national ETS. The National Council for Climate Change, established in November 2021, is responsible for developing the system. Key design elements such as the timeline and sectoral scope remain to be determined. The proposal will go through stakeholder engagement before decisions are made on features such as the allocation framework.