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Tuesday, February 7, 2023

Climate change: EU agrees deal on a more ambitious Emissions Trading System

Members of the European Parliament (MEPs) and EU governments on Saturday, December 17, 2022, agreed to reform the Emissions Trading System (ETS) to further reduce industrial emissions and invest more in climate friendly technologies.

European Parliament
The European Parliament

The EU Emissions Trading System (ETS), which enshrines the “polluter pays” principle, is at the core of European climate policy and key to achieving the objective of EU climate-neutrality. By putting a price on greenhouse gas (GHG) emissions, the ETS has triggered significant reductions in EU emissions, as industries have an incentive to reduce their emissions and invest in climate friendly technologies.

Increased ambitions for 2030

Emissions in the ETS sectors must be cut by 62% by 2030, compared to 2005, which is one percentage point more than proposed by the Commission. In order to reach this reduction, there will be a one-off reduction to the EU-wide quantity of allowances of 90 Mt Co2 equivalents in 2024 and 27 Mt in 2026 in combination with an annual reduction of allowances by 4.3% from 2024-27 and 4.4% from 2028-30.

Phasing out free allowances to companies

The free allowances to industries in the ETS will be phased out as follows: 2026: 2.5%, 2027: 5%, 2028: 10%, 2029: 22.5%, 2030: 48.5%, 2031: 61%, 2032: 73.5%, 2033: 86%, 2034: 100%.

The Carbon Border Adjustment Mechanism (CBAM), on which MEPs reached an agreement with EU governments earlier this week to prevent carbon leakage, will be phased in at the same speed that the free allowances in the ETS will be phased out. The CBAM will therefore start in 2026 and be fully phased in by 2034.

By 2025, the Commission shall assess the risk of carbon leakage for goods produced in the EU intended for export to non-EU countries and, if needed, present a WTO-compliant legislative proposal to address this risk. In addition, an estimated 47.5 million allowances will be used to raise new and additional financing to address any risk of export-related carbon leakage.

An ETS II for buildings and transport

A separate new ETS II for fuel for road transport and buildings that will put a price on emissions from these sectors will be established by 2027. This is one year later than proposed by the Commission. As requested by Parliament, fuel for other sectors such as manufacturing will also be covered. In addition, ETS II could be postponed until 2028 to protect citizens, if energy prices are exceptionally high. Furthermore, a new price stability mechanism will be set-up to ensure that if the price of an allowance in ETS II rises above €45, Some 20 million additional allowances will be released.

Financing the green transition

More money will be made available for innovative technologies and to modernise the energy system.

The Innovation Fund, will be increased from the current 450 to 575 million allowances.

The Modernisation Fund will be increased by auctioning an additional 2.5% of allowances that will support EU countries with GDP per capita below 75% of the EU average.

All national revenues from auctioning ETS allowances shall be spent on climate related activities.

MEPs and Council also agreed to establish a Social Climate Fund for the most vulnerable. A more detailed press release on this is available here.

Inclusion of emissions from shipping

As requested several times by Parliament, the ETS will, for the first time, be extended to maritime transport. You can read more on this part of the agreement here.

Market Stability Reserve

24% of all ETS allowances will be placed in the market stability reserve to address possible imbalances between the supply of and demand for allowances in the market due to external shocks such as those caused by COVID-19.

Waste

EU countries must measure, report, and verify emissions from municipal waste incineration installations from 2024. By 31 January 2026, the Commission shall present a report with the aim of including such installations in the EU ETS from 2028 with a possible opt-out until 2030 at the latest.

After the deal, rapporteur Peter Liese (EPP, DE), said: “This deal will provide a huge contribution towards fighting climate change at low costs. It will give breathing space for citizens and industry in difficult times and provide a clear signal to European industry that it pays off to invest in green technologies.”

In a reaction, Ottmar Edenhofer, Director of the Potsdam Institute for Climate Impact Research (PIK) and the Mercator Research Institute on Global Commons and Climate Change, said: “Europe is getting serious about climate policy – to protect people and businesses from increasing climate risks. The new emissions trading system for transport and heating in buildings opens up the way for reducing greenhouse gases not only in industry and the energy sector, as before, but in a large part of the economy – which substantially broadens the efforts to tackle the climate challenge.

“A path has now also been marked out for the urgently needed social compensation scheme. While we need to make faster progress along these paths and achieve more than has been decided in detail this weekend, the most important thing is that the direction that Europe is taking is clear. It now is, more than ever.”

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