Among the compromises reached between the European Parliament’s political groups on the revision of the European Union’s Emissions Trading System (ETS) on Tuesday 10 May, negotiators agreed on a proposal to establish a bonus-malus system linked to free allowances granted to companies covered by the ETS.
Led by Peter Liese (EPP, Germany), Parliament’s rapporteur on this dossier (see EUROPE 12867/3), the proposal aims to incentivise companies to reduce their greenhouse gas (GHG) emissions by rewarding good performers in the sectors covered by the ETS and penalising poor performers.
The basic principle is simple: an installation whose emissions are higher than the reference values for its sector would be sanctioned by reducing its free allowances from 2026 onwards, depending on the implementation of a duly established decarbonisation plan. Conversely, installations with emissions below these values would receive additional free allowances.
The approach taken in the compromise amendment strengthens the conditions attached to this system.
Firstly, the compromise provides that, in the case of installations covered by the obligation to carry out an energy audit or to implement a certified energy management system, the free allocation would only be granted in full if the recommendations of the audit report or the certified energy management system are implemented.
In addition, operators in sectors eligible for free allowances would be required to draw up a decarbonisation plan, compatible with the objective of climate neutrality, for each of their installations.
If either of these two conditions is not met, the amount of the free allowance would be reduced as follows: (1) by 50% for installations with GHG emission levels above the average of the 10% least efficient installations in the sector; (2) by 30% for installations with emission levels below the average of the 10% least efficient installations and above the average of the 50% most efficient installations; (3) by 25% for installations with emission levels above the average of the 10% most efficient installations and below the average of the 50% most efficient installations.
Where both conditions are not met, these percentages would be doubled.
Installations with emission levels below the average of the most efficient 10% of installations would receive an additional 10% of free allowances.
In addition to this bonus-malus system, the negotiators concluded a number of other compromise amendments, most of which have already been detailed in our publication (see EUROPE 12950/9).
Inclusion of the maritime sector from 2024
While the European Commission proposed to cover emissions from ships with a gross tonnage of more than 5,000 tonnes on a progressive basis to reach 100% by 2026, negotiators reportedly agreed to bring this date forward to 2024 and to extend the scope to ships with a gross tonnage of more than 400 tonnes from 2027.
They also agreed to cover, from 2027, 100% of international travel, i.e. travel ending in the European Economic Area (EEA) and travel leaving the EEA.
To prevent shipping companies from circumventing these rules, ports close to the EU should be included in the ETS as early as 2024, negotiators say.
The compromise would also provide for exceptions for the outermost regions and for vessels sailing in the icy waters of the Arctic Ocean (which consume more fuel).
Regarding the use of revenues from the auctioning of allowances from the maritime sector, 75% of these would be paid into an Ocean Fund to support the decarbonisation of maritime transport. Of this amount, 15% should be spent on mandatory biodiversity measures. The remaining 25% would go to the EU budget’s own resources.
Inclusion of the waste sector from 2026
The municipal waste sector, on the other hand, would be covered by the ETS from 2026, according to the relevant compromise amendment.
The inclusion of municipal waste incineration plants should, however, be preceded by a European Commission impact assessment, to be carried out by 31 December 2024, to examine the risks of diversion of waste from incineration plants to EU landfills (which create methane emissions) and exports of waste outside the EU.
This analysis should be accompanied, if necessary, by a legislative proposal to prevent these risks.
Controlling carbon prices
In order to prevent carbon prices from rising too quickly, the negotiators also agreed on a revision of the measures provided for in Article 29a of the EU Directive 2009/29.
The compromise provides for the European Commission to release 100 million allowances from the Market Stability Reserve (MSR) - a mechanism to deal with surplus allowances - if for more than six consecutive months the average price of allowances is more than twice the average price of the previous two years.
Contrary to Mr Liese’s initial proposal, however, this quota release would not be automatic. The European Commission would first have to verify, within 7 days, whether this price increase corresponds to a change in market fundamentals.
While the above-mentioned points are the subject of compromises widely supported by the different political groups, other points, such as the abolition of free allowances and the increase in the ambition of the ETS, continue to divide (see EUROPE 12950/9). The voting session on 16 and 17 May in the Parliament’s Committee on Environment (ENVI) could therefore lead to a close result.
Mr Liese expects that some compromise amendments from the S&D, Renew Europe, Greens/EFA and The Left groups will be rejected later in the plenary vote.
See the compromise and alternative compromise amendments: https://aeur.eu/f/1ls
It should be noted that this document is not yet fully finalised. Thus, not all indications of which groups support the amendments are correct. (Original version in French by Damien Genicot)