Addressing climate change relies on various regulatory levers designed to reduce CO₂ emissions, including fiscal instruments like carbon taxes and carbon markets, both regulatory and voluntary. These tools aim to price greenhouse gas emissions, encouraging businesses and states to adopt more sustainable practices.
In Europe, this regulatory dynamic has continually evolved to enhance the effectiveness of these levers and ensure their credibility. The goal is to create a robust framework that not only limits emissions but also guarantees that carbon compensation and removal mechanisms are reliable and effective. This article focuses on carbon markets, tracing their historical evolution and impact on the European emissions reduction strategy.
Carbon compensation gained traction in the 1990s with the Kyoto Protocol, which introduced flexibility mechanisms like Joint Implementation and the Clean Development Mechanism, allowing countries to offset their emissions by financing projects elsewhere. These mechanisms laid the groundwork for carbon compensation but highlighted the crucial need for a European regulatory framework to ensure transparency and effectiveness in combating climate change.
Evolution of European Regulation
EU Emissions Trading System (EU ETS) – 2005
Launched in 2005, the EU ETS was the world's first carbon market. It sets a cap on emissions for the most polluting industries and allows companies to trade emission allowances. This systm is a cornerstone of the European emissions reduction strategy, aiming to create a robust market where the cost of carbon drives innovation and energy transition.
2030 Climate and Energy Framework – 2014
In 2014, the EU adopted the 2030 Climate and Energy Framework, setting ambitious targets to reduce GHG emissions by 40% from 1990 levels. This framework strengthens the EU ETS and includes targets for renewable energy and energy efficiency, laying the foundation for a more integrated and coordinated climate action approach.
Paris Agreement – 2015
The adoption of the Paris Agreement in 2015 marked a global turning point. The EU played a central role in these negotiations, supporting international cooperation mechanisms like Article 6, which governs carbon markets between countries. This agreement provided a significant boost to European carbon compensation initiatives.
LULUCF and Nature-Based Initiatives – 2018
With the LULUCF regulation (Land Use, Land Use Change and Forestry), the EU integrated carbon sequestration in soils and forests into its climate strategy. This regulation emphasizes nature-based solutions, enhancing the role of agriculture and forestry in carbon compensation. Concurrently, initiatives like the French Low-Carbon Label, launched in 2018, emerged to certify local projects, promoting standardization and reliability in compensation actions.
European Green Deal and Taxonomy – 2019-2020
The European Green Deal, launched in 2019, aims to make Europe the first carbon-neutral continent by 2050. Among its initiatives, the 2020 Green Taxonomy plays a key role by classifying economic activities based on their environmental impact, directing investments towards sustainable projects, including carbon compensation. This framework represents a turning point in the EU’s carbon strategy, setting precise criteria for sustainable activities and supporting a comprehensive vision of ecological transition. These measures will lay the groundwork for the Corporate Sustainability Reporting Directive (CSRD) (see article on CSRD).
Recent developments
Carbon Border Adjustment Mechanism – 2023
Launched in 2023, the Carbon Border Adjustment Mechanism (CBAM) imposes taxes on imports based on their carbon footprint. This mechanism complements the EU ETS by preventing carbon leakage, thereby strengthening the European carbon market. While CBAM itself does not directly reduce taxes for carbon credits, businesses may seek to offset their emissions to minimize their overall carbon footprint, indirectly reducing the impact of European taxes by improving their environmental profile and preparing for future regulations.
Reform of the EU ETS and Carbon Removal Certification – 2023
In 2023, the reform of the EU ETS tightened the carbon market rules by reducing the number of available allowances and including new sectors to intensify CO₂ reduction efforts. Simultaneously, the EU introduced the Carbon Removal Certification Standard (CRCS), a certification framework aimed at ensuring the transparency and effectiveness of carbon removal initiatives. This standard is crucial for establishing clear and reliable criteria, ensuring that carbon compensation projects meet rigorous and verifiable standards. Complementarily, the Nature Restoration Law strengthens this approach by setting binding targets for the restoration of natural ecosystems, which play a key role in carbon capture. Together, the EU ETS reform and CRCS create a coherent and robust structure to effectively integrate carbon removals into the European climate strategy while supporting EU environmental policy objectives.
Outlook 2024: Carbon Removal and Carbon Farming
In 2024, the EU plans to launch new initiatives targeting carbon removal and carbon farming, enhancing carbon sequestration in agricultural practices. These actions, supported by the European certification framework, aim to diversify and intensify emissions reduction efforts in key sectors.
Conclusion
The evolution of European carbon compensation regulation reflects a growing commitment to structuring and strengthening the effectiveness of carbon markets. From early international initiatives to the establishment of certification and transparency mechanisms, Europe has continuously adjusted its legislative framework to ensure that carbon compensation effectively contributes to its climate goals. These efforts, incorporating innovative initiatives and international coordination, lay the foundation for a transition to a carbon-neutral economy by 2050.
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Sources :
Commission Européenne - Nature Restoration Law Proposal
Commission Européenne - Le pacte vert pour l’Europe
European Environmental Agency (EEA) - Nature Restoration Law
EU Emissions Trading System (EU ETS) - Informations sur le Système d'Échange de Quotas d'Émission de l'UE
UNCC – Accord de paris
Ministère de la transition écologique et de la cohésion des territoires Mécanisme d'Ajustement Carbone aux Frontières (MACF)
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