LEAKED: The EU’s carbon market reform proposal

EU climate chief Frans Timmermans says the ETS has been a success because it placed a price on carbon emissions from the energy sector and industry. "So it is a huge incentivising instrument and it is clear that we need to expand it," he told EURACTIV in a recent interview. [European Union, 2021. Source: EC - Audiovisual Service]

A draft of the EU’s revised Emissions Trading Scheme confirms the European Commission’s intention to tighten the cap placed on CO2 emissions from industry and extend carbon trading to cover shipping emissions as well as road transport and heating fuels.

The revised ETS will be the centerpiece of a broader package of twelve EU energy and climate laws that the European Commission will table on 14 July.

The EU’s carbon trading scheme is the main policy underpinning the bloc’s goal of reducing emissions at least 55% by 2030, an objective enshrined in the bloc’s recently adopted European Climate Law.

“The ETS is a core instrument to help the EU achieve the increased 2030 target,” says the draft proposal seen by EURACTIV.

EU climate chief Frans Timmermans says the policy has been a success because it placed a price on carbon emissions from the energy sector and industry. “So it is a huge incentivising instrument and it is clear that we need to expand it,” he told EURACTIV in a recent interview.

The cornerstone of the Commission’s proposed reform is a “a one-off downward adjustment” to the overall cap placed on carbon emissions in sectors covered by the scheme.

The previous ETS was dogged by persistent over-allocation of pollution permits distributed to industry, which depressed carbon prices and kept them below €10 per ton for many years.

Subsequent reforms to the ETS have since boosted the carbon price, which shot up past €50 in recent months, making it more expensive for industries to pollute and giving them an incentive to invest in low-carbon technologies.

Timmermans: EU countries need to face the consequences of higher climate goals

European Union member states have agreed to reach climate neutrality by 2050 and increase their level of ambition for 2030. This means Europe needs to amend all its climate policies, including its Emissions Trading Scheme, the EU’s climate chief, Frans Timmermans, told EURACTIV in an exclusive interview.

Linear reduction factor

Brussels now appears determined to avoid repeating the same mistake, with the draft revision saying “the overall quantity of allowances (‘cap’) will decline at an increased annual pace” in line with the EU’s more ambitious 2030 climate goal.

This “increased linear reduction factor” is still undecided though, with the exact percentage still showing between square brackets, signaling a likely intensification of political haggling within the European Commission before the EU executive adopts its proposed reform on 14 July.

“I’m afraid it will be a very last-minute decision,” said Agnese Ruggiero from Carbon Market Watch, an environmental campaign group specialised in carbon pricing policies.

The linear reduction factor determines how fast the emissions in the ETS decline each year. In the period ranging between 2013 and 2020, it was set at 1.74%.

“We want a one-off reduction of 450 million emission allowances and an increase in the linear reduction factor to 3.1% on an annual basis starting from 2023,” Ruggiero said. “It is a very important part of the reform” and a key demand from environmental groups, she told EURACTIV.

Extension to maritime transport, building and heating fuels

In its current form, the scheme puts a price on every ton of CO2 emitted by the electricity sector, intra-EU flights as well as large energy consuming industries, such as steel and chemicals.

Now, the Commission wants to extend the scheme to cover maritime transport as well as road and building emissions, which would be treated in “an additional emissions trading system.”

“The scope covering only buildings and road transport has clear benefits in terms of economic efficiency compared to an extension to all fossil fuel combustion,” says a summary of the cost-benefit analysis accompanying the Commission’s proposal.

“Many homes are still heated with outdated systems that use polluting fossil fuels such as coal and oil,” the Commission writes, justifying the extension of the scheme to buildings.

Regarding shipping emissions, “the preferred option would be the integration of the maritime transport sector in the existing EU ETS,” the draft document says.

According to the draft proposal, “at least 50%” of the revenue generated by the transport and buildings ETS would have to be redistributed to low income households.

However, EU countries are free to decide how to use the money generated by the scheme, without guarantees that poor households will receive support for both their heating or transport needs.

“It doesn’t have to go for renovation for instance,” said Brook Riley, a lobbyist with insulation manufacturer Rockwool. “As a low-income household, you have the certainty of pricing but only the possibility of support,” he said.

“It’s politically very risky if people feel trapped by higher prices. The bottom line is households must get financial and technical support to react to the price signal and renovate,” Riley told EURACTIV.

EU to launch 'adjacent' carbon market for transport, buildings

A senior EU official on Tuesday (11 May) defended European Commission plans to extend the bloc’s carbon market to road transport, arguing that revenues generated could be used to offset the effects of higher fuel prices on the poorest in society.

The extension of the ETS to road transport and buildings is controversial, with Poland warning about the social impact of a potential rise in heating and transport fuels that is expected to hit the poor disproportionately.

“The Commission seems to be making the choice of taxing poorer households,” Adam Guibourgé-Czetwertynski, Polish undersecretary of state for climate and environment told a recent EURACTIV event.

Pascal Canfin, a French MEP who chairs the European Parliament’s environment committee also warned the Commission against the move, saying it carries huge political risk and does not bring much in terms of emissions reduction.

“Do not make the mistake of extending the carbon market to heating and fuel. We experienced it in France, it gave us the Yellow Vests,” Canfin warned.

Planned EU carbon market reform is 'politically suicidal', warns French MEP

Plans to extend the EU’s carbon market to transport and buildings would be “politically suicidal” and risk triggering social unrest similar to the 2018 Yellow Vests movement in France, warned French MEP Pascal Canfin last week. EURACTIV France reports.

Free allocations and carbon border levy

Elsewhere, the ETS reform proposes to phase out free allocations of carbon credits for industries like steelmaking and the power sector, which are expected to be protected by the EU’s upcoming carbon border levy.

The border measure, which is also due to be presented on 14 July, is designed to put EU firms on an equal footing with competitors in countries like China, which have weaker carbon pricing policies.

The new border scheme is aimed at preventing so-called “carbon leakage” whereby industries move their factories or make new investments abroad in search of lower production costs.

“The Carbon Border Adjustment Mechanism (CBAM) should be an alternative to free allocation to address carbon leakage risks,” reads the leaked ETS proposal. Industrial sectors covered by the new measure “should not receive free allocation,” it adds.

However, the draft does not say when free allocation should be phased out, leaving the decision to EU member states and the European Parliament, which are co-legislators on the proposed reform.

Earlier this year, the Parliament voted to keep free CO2 quotas for industries covered by the EU’s upcoming carbon border charge. The amendment was supported by industry associations, including steel group Eurofer, chemicals association CEFIC, cement association Cembureau, and Fertilizers Europe, which asked lawmakers to ensure the EU’s carbon border policy “co-exist with the current system of free allocation.”

In any event, “free allocation is made conditional on decarbonisation efforts in order to incentivise the uptake of low-carbon technologies,” says the Commission proposal, with eligible installations requested to provide an energy efficiency audit, “or to demonstrate the implementation of other measures which lead to greenhouse gas emission reductions.”

Moreover, getting free allowances will be more difficult, with the introduction of a tighter benchmark system to calculate their level.

No free allocation is foreseen for the separate ETS covering transport and heating fuels.

EU Parliament votes to retain free CO2 quotas for industry

The European Parliament has rejected proposals to phase out free CO2 pollution credits for industries covered by the EU’s Emissions Trading System (EU ETS), even as the bloc plans to gradually replace the scheme with a carbon levy at its border.

This leaves energy-intensive industries like aluminium, chemicals, cement, steelmaking, paper and refining as the only remaining sectors still eligible for free allowances.

According to Ruggiero, this means the Commission is effectively proposing to tax people’s heating and transport fuels to finance the decarbonisation of polluting industries.

“Industrial sectors would continue to get their pollution permits for free while the Commission plans for example to make citizens pay more for heating their homes and driving their cars,” Ruggiero said.

“The proposal even foresees that a part of the auctioning revenues generated by other sectors – and EU citizens – will be invested in industrial clean innovation. A system that makes everyone pay for the only sector that already receives huge exemptions is not a socially fair system,” she said.

[Edited by Josie Le Blond]

> Read the full ETS reform proposal below or download here. A summary of the impact assessment is accessible here.

ETS Proposal

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