On Friday, 17 July, the European Commission presented its long-promised review of the EU Emissions Trading System (EU ETS). In response to heated political debate and pressure from industry, the Commission made a number of concessions, albeit not as radical as those demanded by the system’s critics.
So how does the EU’s executive branch propose to ease the burden of carbon taxation on European industry? EcoPolitic presents an overview of the key changes.
More funding for decarbonisation
The European Commission considers financial support for eco-modernisation to be one of the key factors in reducing the pressure of the EU ETS on industry. Consequently, the review of the carbon market focuses primarily on instruments that will provide businesses with more money — either as aid for the ‘green’ transition or as a reward for it.
Industrial Decarbonisation Bank (IDB). This new financial tool will return a larger share of ETS revenues to the businesses that generated them. The preliminary amount discussed is €100 billion for industrial decarbonisation projects.
- ETS Investment Booster. This will operate during the initial stage of the IDB and envisage support totaling €30 billion. These funds will serve as a financial stimulus for companies that invest in early-stage decarbonisation.
- Innovation Fund. This existing mechanism will be retained. It will continue to operate to bring low-carbon innovations to the market.
An important proposal is to require EU member states to spend at least 50% of their national revenues from ETS to support decarbonisation in the industrial sectors that generate these revenues. In most cases, these funds are used inefficiently. As we previously reported, Italy used only 9% of ETS funds for targeted climate measures.
Low-income countries can still rely on support from the Modernisation Fund. The European Commission's proposal provides reliable safeguards on the rule of law to protect the fund's resources. The countries supported by this fund had previously demanded an increase in funding for their decarbonisation projects.
Allocation of free allowances
Companies will be able to receive free carbon emission permits even after 2030. It is proposed to increase their amount to €6 billion for the period 2026–2030.
The European Commission also proposes special conditions for sectors covered by the Carbon Border Adjustment Mechanism (CBAM). For them, the pace of phasing out free quota allocations will be slowed down. The gradual phase-out will be extended until 2038.
Extension of CO2 emission permits issuance
The changes provide for the continued issuance of allowances within the EU ETS framework into the 2040s. To this end, the European Commission has updated the linear reduction factor (LRF). It will be up to 3.7% for the period from 2031 to 2035 and 1.7% for the period from 2036 to 2040. It is worth noting that ten EU countries, in a joint statement, demanded to give industry the right to emit greenhouse gases until 2050, when the EU is supposed to have already achieved climate neutrality.
At the same time, no one intends to abandon the European Union’s overall climate target — to reduce greenhouse gas emissions by 90 per cent by 2040 compared with 1990 levels.
Market Predictability
To smooth out price fluctuations in the carbon market, the European Commission proposes to reform the Market Stability Reserve (MSR). It is promised to be made more dynamic and adapted for reduction after 2030.
The rate of quota withdrawal to the reserve will decrease from the current 24% to 12%. This will enable a larger number of allowances to remain in circulation for a longer period. The April proposal to abandon the automatic cancellation of quotas in the Reserve remains in force. EcoPolicy wrote about this earlier.
Carbon Removal and Carbon Credits
Changes also affect the instruments by which companies can offset their emissions without actually reducing them. This concerns projects for permanent carbon removal and carbon credits.
The former will be integrated into the European ETS. The proposed volume is 250 million t of captured CO2. The European Commission believes this will help scale up such technologies and, at the same time, support businesses in which it is technologically most difficult to reduce emissions.
The EU must also develop a mechanism for the acquisition of high-quality carbon credits. These may be used after 2036, with the amount allowed up to 2%, while maintaining the target of a 90% reduction in emissions by 2040.
Expansion for Fairness
The European Commission is also proposing to accelerate emissions reductions in the aviation and maritime transport sectors, and to integrate the incineration of municipal waste into the EU ETS. Among the proposals is support for the introduction of sustainable aviation fuel. In particular, this concerns:
- Including in the ETS all international flights departing to destinations within 5,000 km from the center of the EU. This will also apply to all flights operated by business jets, both arriving and departing.
- The coverage of the ETS is planned to be expanded to certain categories of small vessels with a carrying capacity of 400–5,000 t. This is justified by the reduction of loopholes for avoiding taxation and by ensuring a level playing field.
- The waste incineration sector will gradually be connected to the carbon market as well.
