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How the EU ETS Puts a Price on Carbon

?The Europen Union Emission Trading System (EU ETS) is the world's first and largest #carbonmarket that caps emissions and puts a price on carbon.?

?It works on the 'cap and trade' principle, where a cap is set on the total amount of #greenhousegasses that installations covered by the system can emit.?

?The cap is reduced over time so that total emissions fall. Within the cap, companies receive or buy emission allowances which they can trade with one another.?

?They can sell any excess allowances or buy additional allowances as needed.?

?The ability to trade allowances means that emissions are cut where it costs the least.?

?The limit on the total number of allowances available ensures that the environmental goals are met.

?The EU ETS covers around 45% of the EU's greenhouse gas emissions, including those from power stations, industrial plants, and airlines operating between countries.?

?Each year, the number of allowances is reduced to cut emissions in a cost-effective way.?

?This 'cap and trade' approach gives companies the flexibility to reduce emissions in the way that suits them best.

?The revenues from auctioning allowances are invested in climate and energy-related projects across EU countries.?

?The EU ETS is a key tool for reducing greenhouse gas emissions cost-effectively and meeting the EU's climate change objectives.?

?The system has also inspired similar cap and trade schemes in countries worldwide, including China and South Korea.

?In summary, the EU ETS puts a price on carbon by capping emissions and enabling companies to trade emission allowances.?

?An Introduction to the Carbon Border Adjustment Mechanism (CBAM)

?The EU's Carbon Border Adjustment Mechanism (CBAM) regulation officially entered into force on 17 May 2023.?

?The #CBAM establishes a #carbonprice on imports of certain goods into the EU from countries with less ambitious climate policies.?

?Its goal is to prevent carbon leakage, the transfer of production to countries with lower environmental standards.

?The CBAM requires importers to buy emissions certificates to match the carbon price that would have been paid had the goods been produced under the EU's Emissions Trading System.?

?The CBAM will initially apply to cement, fertilizers, aluminum, iron, and steel imports. Over time, it may expand to include other carbon-intensive sectors.

?Like the EU ETS, the CBAM puts a price on carbon by capping total emissions and allowing companies to trade emissions certificates.?

?However, while the EU ETS targets emissions from within the EU, the CBAM targets emissions embodied in goods imported into the EU.?

?The CBAM aims to level the playing field between EU producers and non-EU competitors by subjecting imports to a similar carbon price as domestic producers face under the EU ETS.

?The CBAM is a pioneering policy that could incentivize trade partners to strengthen their climate ambitions over time.?

?However, there are risks, like starting a green trade war if trade partners retaliate against EU exports.?

?Comparing the CBAM and EU ETS: Similarities and Differences

?While similar in their goal, there are some key differences in their scope and implementation.

?The CBAM aims to level the playing field between EU and non-EU companies by placing a carbon price on imports of goods from countries with less stringent climate policies.?

?The CBAM covers sectors at high risk of carbon leakage like iron, steel, cement, fertilizer, aluminum, and electricity generation.?

?Importers must buy CBAM certificates to match the carbon price that would have been paid had the goods been produced under the EU ETS.

?Each facility receives or buys emissions allowances which they can trade with one another as needed.?

?The EU ETS aims to incentivize investments in low-carbon technologies and energy efficiency improvements. The number of allowances declines over time to reduce overall emissions.

?While the CBAM and EU ETS differ in scope, they share the goal of carbon pricing to drive emission reductions.?

?The CBAM complements the EU ETS by applying a carbon price to imported goods and domestic production. Together, these mechanisms can help the EU achieve its climate targets cost-effectively while mitigating carbon leakage risks.?