Instrument Overview
Financial resources can be made available to cities for climate action by participation in international or national emissions trading schemes (ETS) [1].
Why it matters for cities
Revenues from ETS can help boost municipal government resources for infrastructure investment such as low-carbon transport infrastructure.
Key features [2][6]
- Cap and trade system: An overall limit is set on the total volume of GHG emissions that installations in the covered sectors can collectively emit. The reduction targets set by EU policymakers are achieved through the gradual lowering of this cap (Key sectors: Electricity, heavy industry, aviation)
- The EU ETS revenue primarily flows to national budgets and Member States must use it to support investments in renewable energy, energy efficiency improvements and low-carbon technologies that help reduce emissions.
How It Works
- Cap setting: A limit is set on the total greenhouse gases that can be emitted by all regulated entities (e.g., power plants, factories).
- Allowance allocation/auctioning: Emission permits (allowances) are either distributed or auctioned to companies.
- Trading: Companies that reduce emissions can sell surplus allowances, while those exceeding their limits must purchase more.
- Revenue collection: Governments collect proceeds from allowance auctions.
- Revenue distribution: National governments decide how to use the funds, often earmarking a portion for climate and energy investments, which can flow down to cities.
- City-level application: Cities can access ETS revenues to co-finance climate-friendly infrastructure, energy efficiency upgrades, or sustainable transport systems.
Benefits & Challenges for Cities [1]
Benefits
- There are rapidly increasing revenues available from ETS.
Challenges
- A lack of transparency between central and local governments and a flawed accountability system can be a great challenge.
Use Cases
The use of EU ETS revenues for climate action projects in Bucharest, Romania [3][4][5]
Since 2013, power companies in Romania are required to buy rights to emit carbon dioxide - or European Union Allowances (EUAs), as they are called in the European Emission Trading System (EU ETS). They buy these ‘rights to pollute’ at EU ETS auctions at an ever rising cost since they are required to buy more allowances over time.
The idea is that the more expensive it is for power companies to emit, the more likely they are to become energy efficient and switch to greener technologies. And the revenues from the EUA auctions are used to support a greener environment: the government of Romania spends around 70% of the received income on climate investment projects.
Proceeds received in 2013 and 2014 years from auctioning revenues in Romania have been approved for specific climate finance projects, by directly amending the provisions of the Governmental Emergency Ordinance (GEO) 115/2011, issued in 2011. By mid-2015, 139 M€ were allocated to various projects: investments in the Bucharest subway (76 M€), purchase of buses and micro-buses for public transportation (48 M€), reconversion of public transport buses from diesel to liquefied gas (5 M€), implementation of bicycle infrastructure in Bucharest (10 M€).
When to Use It
- The city must be part of a country or region implementing an ETS [1].
References
[2] About the EU ETS - Climate Action - European Commission
[5] https://energy-cities.eu/carbon-credits-think-local/
[6] CMW_EU_ETS_101_guide_2024_v04-1.pdf
Further information can be found on the EU ETS Handbook: https://climate.ec.europa.eu/document/download/8cabb4e7-19d7-45bd-8044-c0dcc1a64243_en?filename=ets_handbook_en.pdf&prefLang=et
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