The EU ETS to 2030 and beyond: adjusting the cap in light of the 1.5°C target and current energy policies

The Paris Agreement calls on countries to pursue efforts to limit global average temperature rise to 1.5°C. We derive a 2016–2050 emission budget for the EU Emissions Trading System (EU ETS) based on cost-effectiveness criteria aimed at achieving the 1.5°C target with a 50%–66% probability, and translate it into a cap reduction path. We show that, under current ETS parameters, the vast majority of this budget will be consumed by 2030. Meeting the budget under current 2030 EU ETS parameters would require drastic – and probably unrealistic – additional efforts after 2030. We derive a cost-effective scenario delivering a smoother and more credible emission pathway. We show that recently increased EU targets for renewable energy and energy efficiency, along with national coal phase-out policies up to 2030 provide cap adjustment potential. If the cap is adjusted to reflect these policies and if phased-out coal capacities are fully substituted through renewable energy, emissions in ETS sectors could decline by 57% through to 2030. This approximates our cost-effective scenario and translates into a linear reduction factor (LRF) for the cap of 3.6% for the period 2021–2030.Key policy insights Paris Agreement-compatible emission budgets can serve as a guideline to define the minimum requirement for emission reductions in the EU ETS.The globally cost-effective emissions budget for EU ETS sectors in line with limiting global warming to 1.5°C is about 30 Gt CO2e for 2016–2050.During the next decade the annual emissions cap must decrease much faster than currently planned to meet the cost-effective budget.Achieving a globally cost-effective emissions path requires that the linear reduction factor (LRF) of the EU ETS cap for 2021–2030 is raised from currently 2.2% to at least 4%.Incorporating EU targets for renewable energy and energy efficiency, as well as national coal phase-outs, enables an increase of the LRF for 2021–2030 to 3.6% without an additional abatement burden on EU ETS installations.