We are pleased to present the latest report prepared by CAKE/KOBiZE at IOŚ-PIB titled “VIIEW on EU ETS 2050: Linking EU ETS with Other Carbon Pricing Mechanisms”. The analysis focuses on the possibilities and effects of linking the EU ETS system with other global systems based on carbon pricing mechanisms, as well as the role of offset mechanisms in achieving international climate goals.
The EU Emissions Trading System (EU ETS) is currently undergoing profound changes aimed at transitioning to a climate-neutral economy. The system’s architecture will evolve with the introduction of CBAM and ETS2 for the construction and transport sectors, as well as the expected depletion of EUA allowances around 2040. The anticipated zero availability of allowances in the EU ETS by approximately 2040 (the so-called “end game”) is expected to impact market liquidity and stability in the 2030s, potentially causing significant price volatility as supply and demand adjust. In this context, the European Commission has recognized the urgent need to reassess the EU ETS (with a review planned for 2026), including evaluating the inclusion of CO2 removals in the system. Changes to the EU ETS may also involve sectoral, emission-based, geographical, or international expansion, such as extending the EU ETS to additional sectors (e.g., municipal waste) and countries (Ukraine, the Balkans), integrating EU ETS and ETS2, or linking the EU ETS with trading systems in other regions and/or utilizing international offset units. Minimizing carbon leakage risks and improving the cost efficiency of emission reductions will be key challenges for the further development of the EU ETS.
The report analyzes:
- the implications of linking the EU ETS with other ETS systems (e.g., UK ETS, systems in Canada, South Korea, China, Mexico, and the USA),
- the introduction of the CBAM border tax mechanism,
- the role of offsets in reducing emission costs,
- the potential establishment of a European Carbon Central Bank (ECCB).
Through macroeconomic analysis, the report attempts to assess how integrating systems might affect CO2 pricing, emission reductions, and economic indicators in different regions. The measures proposed aim to enhance market stability, mitigate carbon leakage, foster international cooperation, and ensure a cost-effective pathway to climate neutrality by 2050.
Modeling Tools and Scenarios
The Climate and Energy Analysis Centre at IOŚ-PIB develops and continuously improves a suite of analytical tools that enable the analysis and evaluation of current and future climate and energy policy proposals at both global and local levels. This analysis presents and evaluates a baseline scenario and two research scenarios reflecting varying levels of ETS integration and other climate policy mechanisms. The research scenarios include linking the EU ETS with other international trading systems and the limited use of offsets in the EU ETS.
- Scenario 1 explores how linking the EU ETS with systems in other regions could reduce emission reduction costs, stabilize allowance prices, and limit economic disruptions.
- Scenario 2 examines the use of offsets within the EU ETS originating from Global South countries. This mechanism could lower emission costs and support low-carbon development in developing nations.
Key Findings from the Analysis
- CBAM and ETS linking can help mitigate competitive disadvantages faced by EU industry and reduce incentives for companies to relocate to regions with lower climate standards. These mechanisms can help countries meet their climate goals more efficiently while minimising cross-border competitive disadvantages. CBAM can incentivise EU trading partners to invest in low-emission technologies. The third country producers exporting to EU can reduce CBAM charges by reducing their emission intensity of production.
- Linking ETSs across regions increases market liquidity, leading to more competitive carbon pricing, technology transfer and lower overall compliance costs.
- ETS linking lowers carbon prices in high price regions and is expected to reduce EU carbon prices by approximately 40-60 EUR/t. EU would likely purchase a notable amount of allowances from other regions, particularly China.
- The global welfare gain from ETS linking, approximated by increase in real household consumption, is estimated to range from around 25 billion EUR in 2035 to 40 billion EUR in 2050.
- In the EU, GDP consistently increases, compared to baseline, throughout the simulation period by approximately 0.2-0.3% (50 billion EUR). In contrast, in most non-EU countries GDP decreases compared to baseline.
- The impact on production of selected individual sectors is much stronger than the aggregate GDP outcome, e.g. in the EU, output of ferrous metals, air transport and water transport sectors increase from 2% to nearly 4% in some periods. Changes in sectoral output are mostly driven by adjustments of exports.
- The use of offsets in the EU ETS could reduce compliance costs and address emissions from sectors with limited decarbonisation options. Using offsets in the EU ETS the consumption gain in the EU is accompanied by GDP increase of 0.15-0.20% (30-45 billion EUR per year). Whereas in Global South countries the GDP decreases by around 0.05% (10 billion EUR per year), driven primarily by exports contraction. Both parties of the offset mechanism experience slight increases in household consumption, by a little more than 0.1% (between 10 and 20 billion EUR per year) in the EU in the years 2040-50, and around 0.05% in Global South countries (around 6-7 billion EUR per year) in the same period.
- European Central Carbon Bank (ECCB) could manage supply in the carbon market, acting as a stabilising force to ensure the system’s effectiveness. By centralising control over allowances, removals and offsets, the ECCB would promote a stable and reliable carbon market environment that supports the EU’s climate goals and contributes to global emissions reduction efforts. This institution could also purchase carbon offsets and support integration with global emissions trading systems.
- EU ETS need to be reformed. As the EU ETS evolves to meet more ambitious climate policy targets, the market faces challenges such as price volatility and concerns about industrial competitiveness, limited social acceptance and the intricacy of extending ETS coverage to new sectors (such as transport and buildings). These issues could destabilise the market, hinder emission reduction efforts, and increase the risk of carbon leakage, where companies relocate to regions with less stringent regulations. Linking ETS systems, the use of offsets and establishing the European Central Carbon Bank could mitigate these risks by managing supply in the carbon market and serving as a stabilising force to ensure the effectiveness and longevity of the system.
This analysis was conducted using advanced modeling tools developed and refined by CAKE experts. Such an extensive and comprehensive analysis was made possible through the implementation of the LIFE VIIEW 2050 project – Assessment of the Long-Term Impact of the European Emissions Trading System (EU ETS) on a Zero-Emission Economy by 2050, implemented by KOBiZE with financial support from the LIFE Programme and the National Fund for Environmental Protection and Water Management.
This is part of a series of analyses exploring various aspects of EU ETS market development. Other analyses, covering topics such as ETS2, carbon removal, hydrogen, or transport policies, are available here.
