The EU’s emission trading system (ETS) is the world’s largest carbon market. Its “cap and trade” scheme provides a mechanism for both reducing the total amount of emissions in a cost-efficient way and ensuring that pollution is priced adequately. A recent study shows that the ETS saved more than one billion tons of CO2 between 2008 and 2016, a 3.8% reduction in total EU-wide emissions. [5] And only this week, carbon prices hit their highest level in more than a decade, despite the sharp contraction in aggregate demand and energy consumption, possibly reflecting the anticipation of tighter climate policies under the European Green Deal (see figure 2). Figure 2 EU ETS price (in euro per ton CO2 emissions)  Source: Bloomberg. Last observation: 15 July 2020. Notes: Energy Broker pricing on Bloomberg updates on a near realtime basis. Updates only occur when there is activity in the market, so there may not be updates to every contract every day. There is no reason for complacency, however. Currently, the ETS only covers economic sectors that together account for less than half of total carbon emissions in the EU, whereas the remaining sectors are subject to a patchwork of non-harmonised measures across the European Union. A global solution is out of reach. Moreover, carbon pricing is not a sufficient condition to manage the transition towards a more sustainable economy. Fostering green investment and innovation This brings me to the second pillar.
Years of subdued inflationary pressure and weak demand have already exhausted the conventional policy space across the industrialised world. And although central banks have successfully relaxed the constraints of the zero lower bound, the risks to financial stability and other side effects emerging from a protracted and intense usage of non-standard measures are likely to rise. For these reasons, central banks cannot just stand on the sidelines when it comes to climate change. And the COVID-19 pandemic has taught us that monetary and fiscal policies are most effective when they complement each other. This will also be true in the fight against climate change. I see three major avenues through which the ECB, and central banks more generally, can contribute. The first is through our involvement in defining rules and standards, and in promoting research for a better understanding of the implications of climate change for financial markets and monetary policy. [11] The ECB is a member of the Network for Greening the Financial System (NGFS) and has contributed actively to the development of the EU taxonomy of sustainable economic activities. These activities are at the same time instrumental for promoting capital markets union. The second way in which the ECB can contribute is by ensuring that we ourselves are an environmentally mindful and responsible investor. We are doing this already for our pension fund investments and are now exploring options for other non-monetary policy portfolios.