Reducing GHG emissions: Putting a price on carbon!

In February the price for the EU emission trading scheme (EU ETS) emission allowances hit its all-time high surpassing 100 Euro per tonne. 

The EU ETS, which obliges certain energy-intensive industries to pay for a proportion of the greenhouse gases (GHG) their operations emit, is one of the bloc’s core climate policies. Since its establishment in 2005, discussions have been focusing on what a “meaningful” price signal should be, whether the policy is effective in reducing industry emissions and if it truly incentivizes and accelerates the implementation of more costly and novel emission abatement technologies versus rather low hanging fruit such as energy efficiency measures.

Until recently and especially in the early phases of ETS, the above has clearly been debatable, given the price for emitting one tonne of GHG was hovering between 3-25 Euro in the period between 2013-2020.

To be able to meet the increased European ambition to reduce GHG by 55% by 2030 versus 1990 levels and to reach a stage of “no net emissions” (more commonly referred to as climate-neutrality) by 2050, the EU has been recently overhauling its climate policies as part of the EU Green Deal and is looking at cementing the “polluter pays principle” further by strengthening and expanding the EU ETS to more sectors.

So far, the direct impact of EU ETS on the Maltese industry has been limited as basically only large-scale electricity production and intra-EU flights have been actively in scope. As Malta boosts no major energy-intensive industries such as steel, aluminum, chemicals production or refining, but relies heavily on importing such raw materials or related finished products, the carbon impact is shifted to the producing countries.

With the planned expansion of the EU ETS to the maritime sector, to fossil fuels used for heating/buildings and road transport as well as stricter rules on aviation emissions, the impact on Maltese businesses and consumers will slightly shift. Furthermore, other carbon taxation aspects such as the Carbon Border Tax Adjustment Mechanism (CBAM), which aims to address the above-mentioned carbon-footprint of imported goods from outside the EU (such as steel, aluminum, fertilizers, certain plastic products or hydrogen gradually as of 2027), will not only add new compliance and administrative cost for companies but will likely also substantially affect pricing of CBAM products going forward (first estimations show a possible cost impact of more than 30% by 2032 for steel).

But even without the same regulatory pressure to reduce the carbon footprint of their operations as some other industries were facing, Maltese businesses have not been idle.  They have been reducing GHG emissions by means of moving to more energy efficient processes or substituting fossil energy/electricity with energy from renewable sources as well as by providing sustainable finance such as ESG-linked loans and earmarked green deposits

This high and increasing carbon price alongside high energy prices in Europe in general could help unlock green investments into novel and more expensive abatement technologies. Not only have we seen the payback period for renewable or energy-efficiency projects (e.g. investments into PV panels, LED lighting) shrinking from years to months in the last year, but at a carbon price of 100 Euro per tonne, carbon capture storage and utilization, use of renewable feedstocks such as green hydrogen or biomass also becomes financially feasible.

Apart from voluntary direct emission reductions or emission reductions driven by regulated carbon markets/policy, companies are also further supporting their climate commitments by seeking to invest into additional GHG emission removals or offsets/avoidance (e.g. nature-based solutions) to achieve net-zero emissions or even to be carbon-negative. When seeking into investing into such carbon credits, one must strive to choose high-quality projects, which build on external verification, permanence and additionality whilst avoiding double counting and over-estimation, as voluntary carbon markets and the carbon credits generated have lately been under large scrutiny. A relatively novel concept linked to the VCMs which can help decarbonize supply chains are “insets”, whilst “offsets” are often linked to projects in unrelated geographies or areas to the business utilizing them (external), an “inset” is a carbon reduction or removal project within the direct supply or value chain of a company (internal). A recent example is the possibility for customers to compensate their air fright shipping emissions using sustainable aviation fuel.

If designed the right way, carbon pricing such as taxation or cap & trade models as well as voluntary measures can be very effective tools to accelerate the transition to a low carbon economy. Some businesses are also implementing internal carbon pricing models, as these help to visualize the long-term value creation potential that can be delivered by a carbon reduction project or investment in novel technologies, which might initially seem financially less attractive compared to typical investment project returns.

For a country like Malta whose industry and businesses are not particular energy-intensive by means of their operations, special focus should also be put on the value chain emissions. Understanding this indirect impact and trying to work jointly with suppliers and customers to reduce emissions will not only support a smooth and orderly green transition of the entire value chain but will also help unlock novel low carbon opportunities and business models.

Dr Kathrin Kutlescha is a manager within EY’s sustainability team, supporting companies in their sustainability, emissions reductions, NFRD reporting and CSRD preparedness steps.