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Emission allowances under the EU Emissions Trading System are allocated through auctioning on the European carbon market. As carbon prices have grown significantly since 2017, so too have the revenues from this auctioning. The revenues that went directly to the 27 EU Member States rose from EUR3.1 billion in 2013 to EUR14.4 billion in 2020 and EUR25 billion in 2021. This increasing trend is expected to continue. Of the total revenues generated between 2013 and 2021, an estimated 75% was used for climate- and energy-related purposes.
The EU Emissions Trading System (EU ETS) is a ‘cap and trade’ system covering the power sector, energy-intensive industries and all airlines operating in Europe (European or not). The public authority sets a greenhouse gas (GHG) emission cap, and installations covered by the EU ETS use allowances to ensure that their carbon emissions comply with this cap. Allowances are either freely allocated or allocated through auctioning by the public authority. Installations can trade allowances, effectively establishing a European carbon market.
Revenues generated from auctioning EU ETS allowances are an increasing source of income for Member States, and have increased significantly since 2017, driven by an increase in the carbon price. In 2021, this price reached more than EUR80 per tonne of carbon dioxide (tCO2), increasing from only EUR5/tCO2 in 2017 and EUR25/tCO2 in 2020.
Total auctioning revenues generated under the ETS system amounted to EUR31 billion in 2021, of which EUR25 billion went directly to Member States. The rest went mainly to the Innovation Fund and the Modernisation Fund .
Member States must use at least 50% of auctioning revenues for climate- and energy-related purposes, such as GHG emission mitigation; climate change adaptation; research and development projects; renewable energy development; transitioning to a low-carbon economy; preventing deforestation; and improving energy efficiency. Between 2013 and 2020, an estimated 75% were used for climate- and energy-related purposes across the EU-27. In 2021 the figure was 76%.
More than 80% of revenues were used for projects at domestic level between 2013 and 2021. In absolute terms, the amounts spent on projects at the international level have remained relatively unchanged (at EUR100-200 million per year). International spending mostly benefits developing countries via multilateral funds and institutions.
The European Climate Law entered into force in July 2021, setting new binding EU-wide climate targets for 2030 and 2050. To achieve these goals, the Fit for 55 package was proposed in 2021. This sets out substantial adjustments to the EU ETS, including the following:
- extending carbon pricing to other sectors (maritime transport, buildings and road transport);
- making emission reduction targets for 2030 for EU ETS sectors more ambitious, by increasing the current target of a 43% reduction compared with 2005 levels to 61%;
- making it a requirement for Member States to use all auctioning revenues for climate- and energy-related purposes.
These adjustments mean that fewer allowances will be available to EU ETS sectors, partly explaining recent carbon price increases.
Of the EU Member States, Poland generated the highest EU ETS auctioning revenue in 2021, at EUR5.6 billion, followed by Germany, at EUR5.3 billion, and Italy, at EUR2.5 billion. Together, these Member States account for about 54% of the auctioning revenues that went directly to the EU-27 in 2021. If Spain and France are included, this share increases to 70%.
Five Member States (Belgium ), Slovakia, Romania, Poland, Czechia) did not meet the requirement to spend at least 50% of auctioning revenues on climate- and energy-related actions in 2021. However, three (Romania, Poland, Czechia) of these almost met the target (47% or more).