Carbon pricing

To reduce greenhouse gas in the most cost-effective way, there needs to be a significant and rising price on carbon.

Carbon pricing is considered to be one of the most cost-effective ways to reduce greenhouse gas emissions, as it gives a clear economic incentive to reduce emissions wherever this can be done at a cost below the carbon price.  A carbon price, depending on its level, will help drive investment in low carbon technologies and power generation.  

Carbon pricing broadly takes two forms, a carbon tax and a cap-and-trade approach where emitters have to buy permits to be able to emit. Hybrids or mixtures of these approaches are often used in practice.

In Europe there is a mixture of carbon pricing measures in place or being developed:

  • the EU Emissions Trading System (ETS); a Europe wide cap-and-trade scheme; and
  • national carbon prices, usually in the form of a tax, in a number of countries, including the France, the UK and Scandinavian countries

Sandbag works to influence these policies to ensure they are robust and deliver a carbon price that drives emission reductions in the covered sectors.  We focus on:

  • exposing the shortcomings of the EU ETS which continues to be affected by a large ongoing surplus of allowances;
  • advocacy related to the development and improvement of national carbon pricing, particularly focusing on the UK, France and Germany; and
  • advocacy related to the need for a sufficient carbon price to drive coal phase out in Europe.

The EU Emissions Trading System

The EU ETS applies a legal annual caps decreasing over time, on around 40% of Europe’s greenhouse gas emissions, mainly from power generation and large industry.  It creates tradable emissions rights and delivers a carbon price.

Since the beginning of this decade, the EU ETS has been weakened by a surplus of allowances and low prices.  As a result, it is failing to provide the appropriate signals either for emissions reductions now, or long term investment towards a low carbon economy. 

Sandbag was originally set up to focus on scrutinising and reforming the EU ETS.  We’ve had many successes, but there is much more to do.  We focus our work on strengthening the EU ETS, especially looking to achieve a more appropriate level of allowance supply.  

For the recent reform of the EU ETS, which was agreed in November 2017 and is expected to be formally approved in Spring 2018, we analysed different options for reform and based our advocacy work on the findings. Our key asks were for reform that substantially tightens the supply demand balance in the market, and leads to a price adequate to help make the transition to a low carbon economy and to meet the EU’s obligations under the Paris Agreement. Recent reports have looked at:

  • Rebasing the cap to reflect actual emissions at the end of each Phase;
  • Retirement of allowances from the Market Stability Reserve (MSR);
  • How to focus assistance to industry to prevent carbon leakage on those that need it most; and
  • The value of additional actions beyond carbon pricing in reducing emissions.

With the overall reform finalized, our attention will now focus on the elaboration of the detailed rules in implementing legislation, such as the allocation of allowances, to ensure the EU ETS effectively drives emissions reductions in the sectors covered.

We have also developed tools such as the EU ETS Dashboard to help decision makers understand the EU ETS in more detail.

We work to influence the European Commission, European Parliament, key Member States and other major stakeholders and to raise public awareness of and engagement in the policy making process.

Sandbag Successes

Our successes have included:

bringing to light the vast surplus that is preventing the EU ETS from working – and winning reforms that are improving the system;

improving the design of the EU ETS Market Stability Reserve, and winning reforms which will now see billions of tonnes of spare CO2 allowances cancelled;

securing limits to exclude low quality offsets from the EU ETS;

highlighting the enormous over-allocation of free allowances in the EU ETS to large industries, and the unearnt profits that have resulted;

successfully advocated for retention of the UK’s carbon price support mechanism, ensuring a rapid coal phase-out.

Latest carbon pricing blog posts


Persistent surplus risks stymieing EU ETS reform, finds research from Sandbag

The latest data analysis from think tank Sandbag shows that the reforms being widely considered for the EU ETS are unlikely to be effective drivers of decarbonisation, as they will fail to deal with...

Parliament Carbon Border Adjustment vote a welcome call for EU ETS reform

The European Commission’s plan for a Carbon Border Adjustment Mechanism cleared its first hurdle today as the ENVI Committee of the European Parliament passed an own initiative report broadly...

Now boarding for better climate action under EU ETS aviation rules

It’s a major year of reform for many aspects of the EU ETS, and aviation is no exception. The European Commission will soon decide how its key climate policy will interact with international...

MSR Claims vs Facts

Seen an industry claim on the Market Stability Reserve? Not sure what the facts are? We get to grips with the proposal here.

Destroy Carbon

Sandbag's project to allow members of the public to permanently cancel permits-to-pollute from the Emissions Trading System.
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