The ninth edition of the annual “State of the EU ETS” report was published on Tuesday. The document is a joint effort between ERCST, Bloomberg, the Wegner Center at the University of Graz, and Eco Act and “aims to provide an independent contribution to the policy debate on the role and effectiveness of the EU carbon market”, as stated by the authors.

The report makes particular note of the major milestone achieved last year from the environmental perspective. “2023 stands out as an exceptionally significant year for the EU ETS, marking a 16% reduction in emissions – the most substantial decrease since its inception in 2005.”

The authors also analyzed the drivers of the decrease compared to the previous year. In the industry sector, the decline of 7% in EU ETS-covered emissions was largely due to higher energy costs leading to reduced production, while “EUA prices at current levels played only a minor role.” The authors warn that “ reduced emissions due to a drop of output activity, could be a real concern.”

In the power sector, the considerable emissions reduction was the result of “remarkable displacements in the electricity mix, with solar, wind, and hydro largely compensating the decrease in the use of natural gas and coal.” The report also noticed that the total power generation also declined amid the economic crisis and increased energy efficiency.

From a market functioning point of view, last year was more stable with the confirmation of reforms and additional supply amid the RePowerEU sales. Based on its calculations, ERCST estimates that “between 235 and 307 million allowances will be sold in the carbon market between 2023 and 2026.” The decision led to higher supply “taking the pressure off the market and reducing the event-driven fluctuations in EUA prices that had become commonplace in 2022.”