After several months of discussions, European Parliament negotiators on the revision of the European Union Emissions Trading System (ETS) finally agreed on compromise amendments covering the bulk of the revision proposal on Tuesday 10 May, following the tenth meeting between rapporteur Peter Liese (EPP, Germany) and the shadow rapporteurs of the other political groups.
The proposed revision is the centrepiece of the climate legislation package designed to put the EU on track to reduce its net greenhouse gas emissions by at least 55% by 2030 (‘Fit for 55 package’).
It aims not only to increase the ambition of the current Emissions Trading System (ETS1) - notably by including the maritime sector - but also to create a new carbon market covering emissions from building heating and road transport (ETS2 - see EUROPE 12762/1).
Introducing ETS2 in two stages
On ETS2, negotiators agreed to extend its scope to all fuels, thus aligning themselves with the position of Mr Liese (see EUROPE 12867/3).
However, it would initially apply only to commercial buildings and commercial road transport activities, from 2025 (1 year earlier than in the European Commission’s proposal).
In 2026, the European Commission would be tasked with analysing the possibility of extending the ETS2 to private households by providing a detailed assessment of the evolution of energy poverty and mobility in the EU and in each Member State.
On the basis of this analysis, the institution could then propose to the co-legislators a new legislative initiative to cover households from 2029.
The compromise also provides for an ‘emergency break’ for households in two cases.
Firstly, the ETS2 would be suspended for households if, in the 6 months preceding the year of its entry into force for households, the average price of fuel for private consumption was higher than the average price in March 2022. The suspension would end once the price falls below this threshold.
Secondly, in the case of a late start of the ‘Social Climate Fund’ (SCF) (an instrument to compensate for the impact of ETS2 on the most vulnerable households), the implementation of ETS2 would be delayed until this fund has been operational for at least 3 years.
A price ceiling
The negotiators also want to set a maximum price of €50 per tonne of CO2 in the ETS2.
Whenever the average price of emission allowances exceeds this ceiling, 10 million allowances would be released from the ‘Market Stability Reserve’ (MSR) - a mechanism to deal with excess allowances - to increase the supply of allowances in the ETS2 and thus push the price of CO2 down.
The European Commission would be responsible for evaluating the effectiveness of the price ceiling by 2029, with a view to possibly proposing to adapt it from 2030 onwards.
Limiting the impact on households
In another compromise amendment, the negotiators propose to introduce a system to ensure that entities covered by ETS2 limit the passing on of their additional costs (due to ETS2) to final consumers.
This would require regulated entities to report to the European Commission the percentage of costs associated with the surrender of allowances that is passed on to the final consumer and to provide the Commission with an explanation where this percentage varies by more than 5 percentage points from the last reporting period.
Furthermore, they would not be able to pass on more than 50% of the costs of surrendering allowances under the ETS2 to the final consumer. Otherwise, they would be obliged to pay a penalty to the ‘Social Climate Fund’.
However, this system of limiting the passing on of costs to households would need to be assessed by the European Commission beforehand, in order to examine its feasibility.
No agreement on free quotas
As regards the ETS1, the Parliament’s negotiators were unable to agree on a number of points which will therefore be the subject of alternative compromise amendments.
This is particularly the case with the abolition of free quotas.
Negotiators from the Greens/EFA, S&D, Renew Europe and The Left groups are defending a compromise that would see all free emission allowances for sectors covered by the future ‘Carbon Border Adjustment Mechanism’ (CBAM) eliminated by 2031, 6 years earlier than the European Commission’s original proposal (see EUROPE 12762/5).
This approach foresees maintaining 90% of the free allowances for these sectors in 2025, 80% in 2026, 70% in 2027, 50% in 2028, 25% in 2029 and 0% in 2030 (see EUROPE 12895/11). Mr Liese, on the other hand, wants to reduce these free allowances by 10% between 2028 and 2030, and then by 17.5% each year to reach 0% by the end of 2034.
Taking up a proposal by the rapporteur, the negotiators agreed to introduce a bonus-malus system aimed at rewarding companies with good decarbonisation results and penalising the others through the allocation of free allowances. EUROPE will continue to follow this story.
Another sticking point is the one-off reduction in the number of allowances in circulation in the ETS1 and the intensity of the increase in the linear reduction factor (LRF - the percentage by which the ceiling will be reduced each year).
While the Greens/EFA, S&D, Renew Europe and The Left groups want to remove around 205 million surplus CO2 allowances on a one-off basis (compared to 117 million in the European Commission’s proposal), the EPP and ECR oppose this possibility.
The first groups mentioned above also propose to raise the LRF to 4.2%, while providing for an annual increase in the LRF of 0.1% per year.
According to the approach advocated by these groups, emissions from the sectors currently covered by the ETS1 would be reduced by 67% by 2030 compared to 2005 levels, 6% more than the European Commission wants. In line with the latter, Mr Liese considers this level too ambitious (see EUROPE 12942/4).
Use of ETS funds
With regard to the use of revenues from the auctioning of allowances, the discussions did not lead to a compromise on all points.
Unlike Renew Europe (divided on the issue) and the conservatives (ECR), the EPP, S&D, Greens/EFA and The Left groups want to ensure that the funds cannot be spent on either fossil fuel or nuclear projects.
However, the political groups were largely united in favour of a compromise that would see at least 12% of the revenue allocated to climate-friendly public transport and at least 12% to international climate financing.
They also agreed to strengthen the ‘Innovation Fund’ and redefine its scope.
It will be renamed the Climate Investment Fund and will no longer be used only to finance innovations, but also existing decarbonisation technologies that need financial support to develop.
A total of 1.46 billion allowances will be added to the fund (i.e. about 50 million additional allowances). If these are auctioned off at a unit price of €100, the total value would be €146 billion. More than one tenth (12%) of the fund would be reserved for investments in exclusively renewable energy.
The ‘Modernisation Fund’ would also be increased.
Finally, regarding the inclusion of the maritime and waste sectors in the ETS1, as well as the mechanism applicable in case of excessive CO2 price increases, the compromises reached between the political groups correspond to what was expected (see EUROPE 12947/5). EUROPE will continue to follow this story.
The vote on the compromise amendments and the draft report will take place on 16 and 17 May in the Parliament’s Committee on the Environment, Public Health and Food Safety.
See the compromise amendments: https://aeur.eu/f/1ky (Original version in French by Damien Genicot)