International Emissions Trading System and climate finance

Author

Em Fenton

they/them

Senior Director, Climate Diplomacy

Em supports climate vulnerable countries in multilateral negotiations, centring justice and equity...

Download documents

Download submission

Background

Shipping and aviation jointly produce 6% of the world’s GHG emissions each year. When the potent non-CO2 impacts from aviation, such as contrails, are included, this figure rises. However, due to the international nature of these industries, they are largely unaddressed in countries’ Nationally Determined Contributions (NDCs) under the Paris Agreement, and most of these emissions are not accounted for or priced.

This allows these industries a free pass to continue pollution unabated. It also misses out on emissions pricing revenues that could be instrumental to facilitating the just and equitable transition of these polluting industries away from fossil fuels.

Em Fenton, Senior Director of Climate Diplomacy, says:

“The revision of the EU ETS provides a rare and critical opportunity to address these gaps, creating incentives and a business case for investment in decarbonising these sectors, collecting valuable revenues to contribute to these sectoral transitions and the EU’s international climate finance commitments, and ensuring that polluters pay.”

The scale of the problem

Research has estimated that expanding the EU Emissions Trading System (ETS) to include international flights could add up to €30bn per year in revenues, if it is implemented ambitiously. The EU has committed to the New Quantified Collective Goal (NQCG) under the Paris Agreement of Annex I (developed) countries providing $300bn USD per year to non-Annex I (developing) countries by 2035.

This report finds that an expanded International ETS would generate enough revenue to finance up to 50% or more of what the EU and its Member States owe towards this.

What’s covered in the report?

The report gives an overview of the EU ETS and the growth of emissions trading schemes globally. It clarifies questions, lays out the robust contextual foundations for international flights to be included in the EU ETS, and examines its global scalability.

Next, it contextualises the climate landscape both globally and within the EU, and draws links between these, both now and looking to the future.

Lastly, it joins these two by looking at what revenues might result from the expansion of the ETS, and how these are and could be used, both domestically and internationally to support a just and equitable transition of these sectors, as well as climate finance more broadly.

Our recommendations

The report recommends that the EU adopt the following measures:

Extend aviation ETS to departing extra-EEA flights, capturing the 60% of aviation’s climate impact currently excluded from the scheme, including the most profitable long-haul routes operated by European, US, Gulf and other carriers. This would generate €10bn in additional annual revenue by 2030.
Act on aviation’s non-CO2 effects, building on the reporting requirement introduced in 2025 by using the ETS to incentivise operational adjustments that reduce contrail and other non-CO2 warming impacts, which at least double aviation’s total climate footprint.
End the shipping ETS exemption for vessels between 400 and 5,000 gross tonnage (GT), closing a gap that leaves a significant share of maritime emissions unregulated, and reserve zero-rating for truly sustainable Renewable Fuels of Non-Biological Origin (RFNBOs) and not biofuels.

With respect to their climate finance commitments, it recommends that the EU and its Member States:

Publish multi-year climate finance pledges ahead of COP31 in Ankara, detailing how contributions will scale up towards their New Quantified Collective Goal (NQCG) commitments by 2030.
Give special attention to adaptation finance, which remains the most severely underfunded component, according to the United Nations Environment Programme’s (UNEP) Adaptation Gap report.
Actively explore new sources of finance, including revenues from international carbon pricing, given that several major donors are cutting aid budgets. This would not only make up the shortfall but would reinforce the EU’s leadership role in climate diplomacy.

Lastly, it recommends the EU to consider:

Introducing a binding requirement in the ETS Directive mandating that Member States earmark a defined share of international ETS revenues for international climate finance.
Establishing a dedicated EU funding mechanism, directly channelling a portion of international ETS revenues to the UN Adaptation Fund on a predictable, year-on-year basis.
Allocating a modest but ring-fenced portion of ETS revenues would strengthen the EU’s international carbon pricing and capacity-building programmes. This could include ‘ETS/MRV as a service’ and the expansion of current initiatives, such as EU Climate Dialogues 2, to cover more partner countries and a broader range of technical areas.