During a previous session, a speaker asked us if we could address the issue of greenhouse gas emissions trading.
That is what we have chosen to do today, knowing that the emissions trading system, as it is known in French, is a key issue for two reasons: first, the carbon market is one of the pillars of the European Union’s decarbonization strategy. Second, the price of emissions has a significant impact on the cost of energy for consumers.
As we will see in the rest of this presentation, the principles underlying the emissions trading system are basically quite simple. However, implementation is quite complex. That is probably an understatement.
And clearly, we will not be able to cover the subject in its entirety in a single session. You should therefore consider this session as an introduction and plan to attend one or more follow-up sessions in the fall. The emissions trading system is based on the polluter pays principle.

THE EUROPEAN EMISSIONS TRADING SYSTEM

What is the polluter pays principle? It is a system, a set of rules whereby greenhouse gas emitters must pay for their emissions, since these have a cost for the community. And in this case, the community is the whole of humanity. And this cost must be internalized.
The system was established by a European directive in 2023 and will be implemented in 2025, making the European carbon market the oldest in the world. In 2021, we entered the fourth phase of the scheme, covering the period 2021-2025. There have been three previous phases.
Phase 1, 2005-2007, was a launch phase with national emission quotas. Phase 2, 2008-2012, corresponded to the implementation of the Kyoto Protocol. Phase 3, 2013-2020, saw the introduction of European quotas.
The stated goal is to reduce emissions by 20% in 2020 compared to 1990 levels. And at the end of the period, an important price regulation instrument will be put in place, known as the Market Stability Reserve. The emissions trading system covers 40% of the European Union’s total emissions.
It covers carbon dioxide, methane, nitrous oxide and a number of other greenhouse gases. Geographically, in addition to the European Union, it covers Liechtenstein, which is not much, but nevertheless a country, Iceland, Norway, bearing in mind that Switzerland has its own system and that this system is linked to that of the European Union. Let us now turn to the operating principles of this system.

PRINCIPLES OF THE CARBON MARKET : CAP & TRADE

The emissions trading system is based on two principles, which are shown on the screen. The first principle is a cap on emissions. The quantities of greenhouse gases emitted each year by installations on a list are capped, and the emissions cap is reduced each year. The goal is for this cap to be zero by 2050. That is the first principle. There is a second principle, which is the principle of tradability.
Greenhouse gas emission allowances are not simply administrative authorizations; they are administrative authorizations to emit, but they are also what is known in French law as intangible movable property, and can therefore be traded like securities, bonds, or shares. This means that an emitter with surplus quotas can sell them to an emitter that lacks quotas. These quota exchanges lead to the determination of an equilibrium price at any given time, which is a market price, given that this is how the mechanism works.
All other things being equal, the higher the emissions, the higher the price of allowances and the greater the incentive for an emitter to reduce its emissions. These are the operating principles. They are simple, but not entirely trivial, yet the idea is easy to grasp.

PRIMARY MARKET AND SECONDARY MARKET

There are two distinct compartments in the carbon market. The first compartment is called the primary market and the second compartment is called the secondary market. Quotas are created on the primary market.
This creation of quotas is done either by auctioning quotas or by allocating free quotas. In both cases, the quota issuers are the member states, which, once again, either auction or allocate certain quotas free of charge to certain categories of emitters. The newly issued allowances are then traded on the secondary market, which is open to everyone.
In practice, there are three categories of participants in this secondary market. Issuers, who are structurally buyers of allowances, but who may at certain times sell allowances if they issue less than expected. Then there are intermediaries, traders, and investors who buy or sell allowances, either on behalf of others, in the case of traders, or for speculative purposes, in the case of investment funds.
Finally, as we can see on the slide, there is a regulatory instrument, which I mentioned a moment ago, called the Market Stability Reserve, which I will come back to later, but which is essentially a subset of the primary market, with which it is linked.

REGULATION AND TRANSFER OF ALLOWANCES

I won’t go into too much detail about the regulation and mechanics of allowance banking and transfer, because it’s complicated. The directive that describes all this is over 200 pages long, and the annexes to the directive are around 800 pages.
So we have a thick and complicated body of rules. Issuers, for their part, have a number of regulatory obligations. The first of these obligations is to estimate their emissions.
And they must do so using a methodology approved by the administration. In practice, there are two methods for estimating emissions: one based on physical measurement of the greenhouse gas content of flue gases, and one based on calculation. Each year, emitters must estimate their emissions and produce a report covering all greenhouse gas emissions for the year for the facilities that are selected and covered by the system.
This report must be submitted to the competent authority. In France, the competent authority is the Caisse des Dépôts et Consignations. If the allowances submitted to the administration are lower than the verified emissions, emitters are liable to a fine of $100 per missing allowance, bearing in mind that the fine is not a discharge.
The fine must be paid, but the allowances corresponding to the declared emissions must still be obtained. Emitters must also open an account with what is known as the Community Registry. I mentioned earlier that allowances are intangible movable assets, and these movable assets are recorded in an account opened in a registry maintained in France by the Caisse des Dépôts et Consignations.
What will we find in this registry? We will find the allowances acquired by the emitter, the allowances allocated free of charge, the verified emissions that will be subtracted, the allowances owned by each emitter, and then the purchases or sales of allowances. All transactions are recorded in this account. This is a key element of the system. We have an account for issuers, and traders and investors also have accounts, which are slightly different since they are not issuers themselves, but whose purpose is to record all transactions and organize the delivery of allowances between market participants.

EVOLUTION OF THE MARKET DESIGN

As I mentioned, the system was implemented by a 2003 directive and started in 2005. If I remember correctly, it wasn’t on January 1, it was during the year, but that doesn’t matter. It has evolved considerably over the past 20 years, with many changes along the way. I would highlight two categories of change that I think are important.
The first is the change in the number of sectors covered. Initially, the emissions trading system only applied to electricity production facilities above a certain size and large industrial plants. From memory, there were fewer than a thousand facilities at the outset.
Gradually, civil aviation was included in the system in 2012. Civil aviation, aircraft, is not quite the same as a ground-based installation, and this posed significant technical problems. It took time to put the mechanics in place. Then in 2024, 12 years later, we brought maritime transport into the system, which poses problems similar to those posed by civil aviation, and waste incineration facilities.
In 2027, it will not be within the emissions trading system as we know it, but we will create a second system called TS2, which will cover emissions from road transport, buildings in the broad sense, the construction sector, and small industry. The system has changed considerably in 20 years, and the aim is to cover a higher percentage of emissions than was originally covered, which, I would remind you, was 40%. At the same time, there have been a number of developments and a number of new rules aimed at regulating CO2 prices.
I will show you a graph later that traces the evolution of CO2 prices, and those of you who follow this market on a daily basis know that it is a volatile market. The regulatory instrument that has been put in place is the famous market stability reserve. It should not be seen as a central bank that regulates prices on a daily basis, but rather as a mechanism to prevent prices from collapsing, as has been the case historically, as we will see later, or, conversely, from reaching peak levels.
The creation of this reserve was an important moment. The reserve was created in 2015, but it came into effect on January 1, 2019, and as we will see later, before the creation of this reserve, for reasons that I will detail, CO2 prices remained below €20 per ton, which was completely insufficient to trigger a reduction in emissions. The principle behind this reserve is once again relatively simple: the European Commission counts the number of allowances in circulation each year. It takes a few months to count the number of allowances, which may seem like a long time, but the number of allowances in circulation is generally known by May 15. I am talking about the allowances in circulation on January 1 of the year, December 31 of the previous year, and the rule concerning this market stability reserve is very simple: if the number of allowances in circulation is too high, then a certain number of allowances are placed in the reserve.
Quotas are not withdrawn from the market; what we do is reduce the number of quotas that will be auctioned. It is through the auction mechanism that the number of quotas in circulation is reduced. Conversely, if the number of allowances is too low, below a threshold defined in the legislation, then a certain number of allowances are taken from the reserve and put back up for auction.
That’s basically how it works. To conclude on the rules, bearing in mind that I don’t claim to have covered the subject exhaustively, there are three important rules to bear in mind. One is the rule on free quota allocations.
As we have seen, there are two ways of creating allowances: auctioning them or allocating them free of charge to certain categories of emitters. These free allocations only apply to industrial emitters. Energy producers must purchase the allowances they need at auction.
The share of free allowances depends on the sector of activity, with companies that are at risk of carbon leakage receiving a higher share of free allowances than others. The third principle to bear in mind is that the European Commission wants to reduce, or rather eliminate, free allowances in the long term. In practice, it wants all allowances to be auctioned by 2030, with a gradual reduction in allocations.
That was the first point. The second point concerns carbon leakage. Companies that are at risk of carbon leakage may receive, in addition to free allowances, a subsidy to offset the impact of the price of CO2 on their electricity supply.
And then there is a third set of rules concerning what is known as the carbon border adjustment mechanism, or CBAM, which is intended to replace free allowances for companies exposed to the risk of carbon leakage. The idea is to oblige importers of certain goods to purchase allowances, known as certificates, when they import these goods into Europe to offset the emissions generated in third countries, bearing in mind that a distinction will be made between third countries that have set up a market similar to the one in Europe and those that have not. The body of rules is complex, involving measures, emissions estimates, registries, quota transfers, reporting, the mechanics of free allowances, the issue of compensation for companies exposed to carbon leakage, and the famous CIBAB.

EMISSIONS HAVE FALLEN SINCE 2005

Managing all these rules on a daily basis is no easy task. Let’s leave the world of rules behind and take a look at what all this has produced. What you see on the screen is the year-on-year evolution since 2005 of greenhouse gas emissions from stationary installations covered by the emissions trading system, expressed in millions of tons of CO2 equivalents.
What do we see? We see that in 2024, emissions from these installations covered by the emissions trading system have been halved compared to 2025. If this were solely due to the system itself, I think we would all agree that this would be quite commendable. However, I have three comments to make. We can see that the rate of emissions reduction has varied from year to year.
We can see that the first drop in 2009 was, as we know, more related to the economic crisis and the subprime crisis than to the European crisis or the system itself. We can see that there was a fairly significant drop in emissions in 2020 linked to the health crisis, a temporary drop since emissions picked up again in 2021, and then the drop in 2023 and 2024 is undoubtedly linked, in part, but to a large extent in my opinion, to the energy crisis. Nevertheless, there have been gains, in that the share of fossil fuels in energy production has fallen significantly over the period, to less than 25% of electricity production today, and this is undoubtedly something that should be credited to the system.

EMISSIONS REDUCTION TRAJECTORY : EUROPE’S AMBITIONS 

Europe’s ambitions are well known, but I will reiterate them here. The European ambition is defined in European climate law. It is twofold: decarbonization, but there are two milestones. The final milestone is carbon neutrality by 2050, but there is an intermediate target of reducing emissions by 55% by 2030 compared to 1990 levels.
This ambition is reflected in the latest ETS Directive of 2023, which sets a target of reducing emissions by 62% in 2030 compared to 2005, includes maritime transport in the system and, as I mentioned, provides for the creation of ETS 2 to cover road transport, buildings and small industry.
Carbon price history
The price history. There are two periods, which are quite clear.
There was a fairly long period, from 2005 to the fall of 2018, when carbon prices were very low, in practice below €20 per ton. The introduction of the market stability reserve pushed prices above €20. Then there was a very sharp increase linked to the energy crisis itself.

Today, prices are at $75 per ton. What determines the price level? It is mainly the conditions of arbitrage between coal and gas for electricity production. Today, the cost of reducing emissions in industry does not play a particular role in price formation.

PRICE SCENARIOS

CO2 price scenario. I’ll start with a truism: it’s quite complicated to predict price trends. Why? Because carbon price trends depend on emissions themselves, on the cost of reducing emissions, and then they depend heavily on the rules.
There are two models, two categories of models for predicting emission prices. Models based on the cost of reducing emissions, a so-called implicit model, where we start from the cost of reducing emissions, particularly in industry, for electricity production and then in industry. And then there are models based on analyzing the conditions of equilibrium between supply and demand.
In an ideal world, these two categories of models would give equivalent results. In reality, this is not the case. We are still faced with quite radical uncertainty.
When we look at all the models, what do we see? We see that some models assume carbon prices will remain stable around current levels until 2030, then rise to €140 per ton in 2039. Then there are models that, on the contrary, see prices rising from now on to reach $120 per ton in 2030, with a plateau, then a rise in prices after 2035, to around $140 per ton. So, you can see that we have two fairly typical price trajectories, and it is quite difficult to draw any conclusions.

CO2 MARKETS OUTSIDE EUROPE

Europe prides itself on being a leader in decarbonization. There are carbon markets outside Europe, particularly in Asia. There is a very important market in China.
There is a market in South Korea. There is a market in Japan. There is a market in New Zealand.
And then, outside Asia, there is a market in Canada. There is a market in California, which is not an independent state, but a state of the United States. I will conclude by giving three prices.
There is no international carbon price. We know the price in Europe. The price in China is around 6 euros per ton.
The price in South Korea is around 25 euros per ton. The price in California is around 30 dollars per ton. These systems have emerged from prices that are significantly lower than prices in Europe.