The European Parliament voted down the biggest reform bill of the European Union Emissions Trading System (EU ETS) after a surprising series of votes that blocked its passage.

The “Fit for 55”, part of the European Commission’s Green Deal, aims to bring EU legislation in line with the new goal of reducing GHG emissions by at least 55% by 2030.

It’s a set of proposals to revise and update the current EU legislation. It will also put in place new initiatives to ensure that EU policies are aligned with the EC’s climate goals.

The reform of the EU ETS was first revealed in July last year. It’s meant for aligning the EU’s cap-and-trade system with the “Fit for 55” program.

MEPs believe that the ETS is at the core of the European climate policy and initiated significant emissions reductions. Specifically, the reform will include:

New ETS II for buildings and road transport (individuals not to be included before 2029)
Phase-out of free EU allowances from 2026 and be fully gone by 2030
EU ETS revenues will be used for climate actions in the EU and its member states.

Why EU ETS Reform Bill Was Rejected

The EU ETS is a system that puts a price on GHG emissions by energy-intensive industries. It’s also thought of as a key tool for cutting emissions cost-effectively. Plus, the fact that it’s also the world’s first major carbon market and is the most liquid carbon futures exchange globally.

In the last 5 years, the EU carbon allowance (credit) futures are up over 1,400% and up ~270% in the last 3 years alone. As such, it’s one of the top-performing asset classes worldwide.

The ETS covers over 11,000 industrial sites, as well as aviation. Together they account for 45% of the EU’s GHG emissions which is equal to about 2 billion tonnes of CO2.

But the European Parliament rejected the bill to reform the ETS with 340 votes against and 265 votes in favor.

The initial proposal is to increase the cap or allowed emissions for the covered sectors to 67% (up from 43%) by 2030. But the conservative lawmakers pushed it back down to 61% in the final reform bill.

According to the Greens and Social Democrats, the “watered down” target wasn’t good enough. It won’t help ensure that heavy-emitting industries will be forced to reduce their emissions in line with the EC’s 55% reduction by 2030.

A spokesperson from the Progressive Alliance of Socialists and Democrats said:

“It wasn’t ambitious enough… We need a solution that will achieve our climate goals and, at the same time, is fit for the industry, for workers, and for European citizens.”

Likewise, Greens MEP Rasmus Andresen noted that the weakened draft law signaled a “black day” for climate protection.

The weakening claim implies a slower reduction of carbon credits, removing 70 million from the market in 2024 instead of the EC’s aim of 117 million in 2024.

On the other side, the right-wing parliamentarians from the European Conservatives and Reformists argued that 67% was far too ambitious. That’s in light of the increasing inflation and surging energy costs.

The rejection of the EU ETS reform bill also postponed votes on two other linked climate proposals. This includes the EU’s Carbon Border Adjustment Mechanism (CBAM), a carbon border levy. It’s an ambitious plan to tax the carbon content of imported goods coming to the EU.

Another climate law that was postponed is a climate fund called the Social Climate Fund. It will be for supporting measures and investments in increased energy efficiency and decarbonization of heating and cooling of buildings.

The Fund particularly includes the integration of energy from renewable sources, and granting improved access to zero- and low-emission mobility and transport.

The Approved Proposals

The EU Parliament did agree on one major legislation that’s part of the Fit for 55. The lawmakers passed the revised CO2 emissions standards for new passenger cars and light commercial vehicles.

The agreement was to completely ban the sale of new diesel or petrol vehicles from 2035. The aim is to speed Europe’s shift to electric vehicles and force carmakers to invest in full electrification.

As per Green Party EU lawmakers:

“15% of the EU’s total greenhouse gas emissions come from road transport. Cutting these emissions is vital if we’re going to reach our climate goals.”

As for the EU ETS and aviation, the passed legislation proposes that the ETS will apply to all flights departing from an airport in the European Economic Area (EEA). It also stated that free allocations to the aviation sector will phase out by 2025.

The legislation also proposes that 75% of the ETS revenues “generated from the auctioning of allowances for aviation are used to support innovation and new technologies.”

For the European Green Deal Frans Timmermans:

“The climate crisis is here, and no EU citizen needs to be convinced of this. We need to put in place measures to uphold our climate targets.”

The proposals in the Fit for 55 package need approval by both the parliament and member states in the EU Council to take effect. The next EU Parliament meeting is this June or July.

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The UK’s Royal Mail revealed an ambitious net zero carbon emissions target by 2040 through its new four-pillar ‘Steps to Zero’ plan.

The British postal service and courier company outlined its plans to reduce emissions from deliveries, operations, and the supply chain. In particular, its net zero plan includes a long-term goal to cut down its carbon emissions per parcel it delivers in the UK from 205gCO2e today to 50gCO2e.

The company’s 90,000 posties are walking over a billion steps daily to deliver parcels to 31 million addresses. These ‘feet on the street’ make the company a green option for delivering parcels.

Yet, its 4-pillar Steps to Zero plan goes further, embracing the urgency of tackling climate change.

Per Simon Thompson, Royal Mail’s CEO:

“A seven-day parcel service, to and from the customer’s door, delivered by a postie you trust and with the lowest emissions is the winning proposition.“

He also added that the environment is the next battleground for businesses. And setting an ambitious target to cut parcel emissions to 50 gCO2e shows the firm’s commitment to minimizing its impact on the environment.

Royal Mail’s Net Zero Emissions Plan

For 2020-21, Royal Mail posted a 5.8% increase in its total carbon footprint which is due to an increased volume of parcels. But it also posted a 6.9% reduction in carbon intensity when intensity is measured per £1m of revenues.

The company seeks to reach its net zero targets by 2040, 10 years earlier than the world’s goal by 2050. It pledged to reduce Scope 1 (direct) and 2 (power-related) emissions by 25% by 2025/26.

At the same time, its target for Scope 3 emissions is a 25% reduction between 2020/21 and 2030.

Such targets are in line with 1.5C from the Science Based Targets initiative (SBTi).

The “Steps to Zero”

Royal Mail’s net zero emissions plan is a four-pillar strategy to address the climate crisis; each pillar consists of specific net zero emissions targets.

Here are the four pillars and their corresponding targets and measures.

1. Net Zero deliveries: fleet electrification

13% of Royal Mail’s total emissions are from final mile deliveries. And so the firm seeks to reduce this to zero by:

Growing electric vans (EVs) to 5,500 by Spring 2023
Investing £12.5m in charging infrastructure across the country in 2022/23
Trying new innovations like drones for remote locations

2. Net Zero operations: 100% renewable electricity

49% of Royal Mail’s emissions are from domestic operations, including transport networks and buildings. Measures to reduce them include:

Moving to 100% renewable electricity across the business from 2022
Reducing the number of domestic flights
Increasing the use of rail
Investing in self-generating renewables

Royal Mail’s largest solar panel installation will go live at the new Midlands Parcel Hub in 2023.

3. Making circular happen: circularity via reuse and reduce

Royal Mail’s 3rd pillar for net zero emissions involves transforming its operations and behaviors toward circularity.

In particular, it will apply reuse models and reduce single-use items, targeting to achieve:

25% reduction in waste by 2030
Increase recycled content of plastic delivery bags
Elimination of cable ties in mail bags
Help customers embrace their own circular journey via its Parcel Collect service

4. Collaborating for action: drive net zero in the industry

The final pillar of Royal Mail’s ‘Steps to Zero’ plan is all about collaboration with other businesses across the UK’s postal system to standardize reporting on CO2e per parcel. This is to help customers make an informed decision about their delivery/courier needs.

Also under this pillar, Royal Mail emphasized its intention to collaborate with other fleet operators to speed up the decarbonization of transport via rolling out of EVs and low emission vehicles.

The company will also look at all commercial vehicles and new fuel types not just electric.

Royal Mail is a member of The Climate Group’s EV100 initiative. The group sought to make EVs “the new normal” by 2030.

According to Royal Mail’s CEO, pulling forward its net zero emissions target by 10 years to 2040 means the company has to:

“… transform the way we collect, process, and deliver the 10 billion letters and parcels we handle each year.”

The company will report its ‘Steps to Zero’ progress annually and later in June through its ESG report.

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Canadian Environment Minister Steven Guilbeault proposed regulations to create Canada’s first carbon offset market to help big industries cut their greenhouse gas emissions.

Same with the general standard, one credit is equal to each tonne of emissions reduced, according to the regulation.

Canada’s First Carbon Offset Credit Market

Carbon offset credits will be created when an entity like a municipality, a company, or a farmer reduces its own emissions more than they have to.

But those credits need to be registered and independently verified first before an entity can sell them.

There are several standards that use different methods to measure and verify emission reduction. These standards provide a robust verification process to ensure the credibility of emission reduction projects. The most widely used ones are Verra, Gold Standard, and American Carbon Registry.

Businesses that pay the federal carbon price can buy carbon offset credits to lessen the cost they have to pay.

Right now, big industrial emitters can buy and sell carbon credits created by other companies under the federal carbon pricing system. But the carbon offset markets will expand this system beyond those firms covered by the regulated pricing mechanism.

Under the carbon offset market, prices tend to be cheaper as demand is created by various buyers and not by regulated mandates. Different factors also impact carbon prices like project type, size, location, and co-benefits.

Companies that are unable to achieve their emission targets can get carbon offset credits by investing in projects that cut carbon emissions. These projects vary from deforestation to industrial gas capture.

The first Canadian carbon offset market is for credits produced by municipalities that capture methane from their landfills.

While future markets will be up for cutting emissions from farmland and forests, as well as reducing or eliminating fluorinated refrigerants in advanced refrigeration systems.

Once this carbon offset market operates, Canada can expect to see more emissions reduction schemes to help entities offset their carbon footprint.

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Ernst & Young (EY) Net Zero Centre analysis revealed that achieving net zero emissions means carbon credits volume will grow by 40x and price be at $150 per ton by 2035.

The pressures to decarbonize are mounting. Over a hundred countries committed to the Paris Agreement and set ambitious climate goals.

Also, the number of organizations and businesses disclosing net zero pledges tripled in 2021. What’s more, investors and consumers are favoring climate action with their money.

All signs are pointing in one direction. Yet, meeting the world’s net zero pledges can be challenging and costly for businesses.

But entities have to find essential and cost-effective emissions reduction and carbon credits can provide that.

As for the EY Net Zero Centre, 50-80% of decarbonization costs in line with the Paris Agreement can be achieved through carbon credit offsets.

Why Carbon Credits Volume Will Balloon by 30x to 40x

The EY’s report provided the outlook for carbon credits and offsets volume between now and 2050. The analysis aims to help companies make clear pathways to net zero emissions by 2050 and manage the uncertainties involved.

Carbon credits are an essential part of the business toolbox. They support earlier and more ambitious net zero commitments of companies.

But hitting net zero emissions can take time and may involve uncertainties. Still, by using carbon credit offsets to reduce emissions, businesses can be profitable in the short run while they’re moving towards net zero in the long run.

Here’s how emissions offsetting works using carbon credits:

Carbon credits volume is expected to balloon by 30x to 40x their current levels if the world is to meet the Paris climate goals.

That’s because competition for carbon credits will heat up, emissions reductions will scale up, and regulations will ramp up.

While it’s certain that the voluntary carbon market poses to explode, how the market develops remains uncertain.

So, to explore the possible carbon credit market role and outlook, the EY Net Zero Centre developed four future scenario models.

The four scenarios consider different combinations of climate, technology, and institutional drivers which are:

Across all four outlooks, the analysis reveals these major findings:

rising demand,
a race to quality, and
higher unit supply costs will make high-quality carbon credits scarce and expensive.

Carbon credit volume will increase to 30-40x current supply by 2035

Rising demand makes the volume and price of carbon credits grow rapidly to 2035. After that, the volume of credits grows more slowly across all the four outlooks analyzed.

The projections for carbon credit supply volumes are shown for four scenarios in the chart below.

The left chart plots the increase in credit volumes needed to meet the emissions reduction commitments by 2050. While the right one shows the share of total reductions met using carbon credits (includes both avoidance-based and removals-based credits).

The volumes rise rapidly in Paris-consistent scenarios. And that’s despite credits having a decreasing share of emissions reductions.

The projections assume that 100% of carbon offsets and credits are high integrity across all scenarios. Also, all credits have additional permanent reductions in emissions.

In other words, there’s no greenwashing. Greenwashing is conveying a false or a misleading claim to make the public believe that a company is reducing its emissions even if it’s not.

Rising demand, race to quality, and climbing unit supply costs = carbon credits become scarce and expensive across all four outlooks

EY’s analysis finds that scaling up carbon credit volumes will deplete available low-cost supply fast. As a result, there’ll be rapid increases in credit prices to 2035 across all four model scenarios.

In a typical market, growing demand for a good/service will not result in higher prices over the long term if supply is elastic.

But the case for the supply of high-quality carbon credits is different. It’s subject to some constraints such as:

geopolitics of climate commitments (ex. the notion of common but differentiated responsibilities)
the increasing importance of more costly removals-based credits.

Average costs of high-quality carbon credits supply will rise as volume increases.

About 40-60% of credits will cost over US$50 per tonne by 2035 as the figure shows.

The price increases will continue after 2035 in most scenarios. This is due to an incremental increase in emissions reductions among businesses.

This scenario will boost competition for avoidance-based credits and raise the need for removals-based credits.

But price increases for the Tech-enabled scenario will moderate after 2030 or 2035. This reflects the common assumption for faster and bigger reductions in technology costs.

Credit Prices Will Rise to US$80-150/Ton by 2035

EY Net Zero Centre’s central estimate deems that countries and companies move quickly to execute actions and policies that are consistent with the Paris accord.

The projection further assumes that costs of abatement and supply of credits will be in the middle or lower end of the range explored.

The graph below reveals the results of these price assumptions.

The analysis suggests credit prices can rise from under $25/tCO2e today to $80-150/tCO2e in 2035. And they’ll continue to rise to $150-$200/tCOe in 2050 (in real 2020 dollars).

Another key analysis by EY is that tightening emissions budgets will affect the mix of carbon credits demanded and how they are used.

Tighter Emissions Budgets Drive Removals-based Credits Up

Changes in technology costs and policy context will shift baselines for carbon credit offset projects. These will make it harder to create credits based on avoided emissions while sboosting the role of removals-based credits.

And so, removal credits become essential in net zero scenarios.

This forecast is very crucial to note as avoidance-based credits dominate the current global use and volume of carbon credits. They account for ~80% of all credits issued and ~90% of all credits used (or retired) in 2020 across the largest voluntary registries.

Thus, technologies that remove carbon from the air will be a vital part of reducing emissions to limit the harsh effects of climate change.

Moreover, stricter government regulations will drive several changes in carbon credit markets.

However, this is unlikely to prevent strong growth in the demand for carbon credits as net zero emissions targets still need offsets.

What’s more significant is that tightening regulation will blur the distinction between voluntary and compliance markets for carbon credits.

This will increase the need for companies to use the supply of high-quality carbon credits, especially beyond 2035.

Lastly, market fundamentals will drive the emergence of large and efficient carbon exchanges. This will enable the trading of a high volume of carbon credits through top carbon exchanges linked to various carbon registries.

All these market trends amplify the risks and opportunities created by the need to reach climate goals. For business leaders, this means the need to engage and act urgently.

And every leader needs to have a clear net zero strategy embracing the role of carbon credit to create new value in a rapidly changing industry.

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