The European Parliament is set to make significant changes to the EU Emissions Trading Scheme (EU ETS) in response to the European Commission’s proposal in July. Among the changes is a radical overhaul of the structure of costs and revenues in the emissions trading market, as the Parliament wants to oblige countries to spend an unprecedented 75 per cent on the decarbonisation of industry. This is clearly set to provoke considerable resistance from governments.
This was reported by Politico, which obtained an exclusive advance copy of the draft report. The document is to be presented by Peter Liese, the MEP responsible for ETS reform.
The battle for carbon money begins
The most radical change is the obligation to return 75 per cent of carbon market revenues to ETS-registered companies. These funds are to be reinvested in the decarbonisation of industrial production. In the summer, the European Commission put forward a more moderate proposal — a 50 per cent share. Although this was effectively a breakthrough, as industry had previously received only around 5 per cent of the funds.
Politico predicts that such a change will spark a veritable storm of criticism and conflict between institutions and governments.
Change in the emissions reduction curve
One of the key features of the EU ETS is the annual reduction in the free emission allowances allocated to polluters. This reduction is determined by certain coefficients, which Lise proposes to adjust significantly.
In the first half of the 2030s, the ratio is expected to fall to 3.4 per cent from 3.7 per cent, which will ease market pressure on businesses. However, in the second half of the decade, the curve for available quotas will dip more sharply, with the ratio falling to 2.3 per cent from 1.7 per cent.
In his email to Lisa, he justified these changes by citing the need to align the linear reduction factor with the 2040 emissions reduction targets. However, the media suggest that the revised trajectory is more likely driven by an attempt to appease both sides of parliament at once: in the first stage, the right, who are more vocal in their support for business; and in the second stage, the left, who insist on the fulfilment of climate commitments.
More free allowances, but there are conditions
A Member of the European Parliament is proposing to increase the number of free allowances. One way of achieving this would be to slow down the phasing out of these allowances for sectors covered by the Carbon Border Adjustment Mechanism (CBAM).
Another approach is to support the European Commission’s proposal to grant free allowances to companies that invest in European decarbonisation projects. Liese proposes that these changes be introduced gradually, between 2031 and 2035. However, major polluters should not expect such leniency.
A boost for carbon capture
It is proposed that carbon removal be included in the EU ETS from 2029, rather than 2031 as proposed by the European Commission. However, the share of credits for biochar is to be capped at 20 per cent in order to encourage other alternatives. In particular, this refers to direct air capture.
Business is ‘slightly’ more important than the climate
According to Politico, the explanatory memorandum on the changes to the EU carbon market begins by highlighting its role in reducing emissions and even makes an emotional reference to the loss of life caused by heatwaves and wildfires.
However, as a representative of the European People’s Party, Peter Liese does, in conclusion, shift to a business-oriented line of argument. He emphasises that “industry can be given more room for manoeuvre without jeopardising climate targets”.
Following the presentation of the report to the European Parliament, the text will enter a phase of debate and amendments. It is expected that a compromise will be reached by the end of the year.
EcoPolitics covered the July package of amendments to the EU ETS in a separate article. A number of experts described these proposals as a watering down of the rules and voiced their criticism.
At the same time, ETS funds are currently being used largely ineffectively. For example, Italy used only 9 per cent of its revenue for targeted measures.
In some cases, revenue from the carbon market is even channelled into projects that are harmful to the environment. For example, over 30 per cent of the Modernisation Fund’s resources were spent on gas and waste incineration.
