Meeting in Luxembourg, the EU27 Environment Ministers agreed, on Wednesday 29 June, to change the pace of the phasing out of free emission allowances compared to the mechanism provided for by the European Commission in its proposal to revise the EU’s Emissions Trading System (ETS).
This was one of the points that forced Member States to negotiate for long hours, during a marathon session at the end of which they finally managed to adopt a common negotiating position (‘general approach’) on five dossiers of the ‘Fit for 55’ package, including the revision of the ETS (see EUROPE 12982/5).
The general approach on the ETS confirms the Commission’s proposal to phase out free allowances for sectors covered by the future ‘Carbon Border Adjustment Mechanism’ (CBAM) over a ten-year period, between 2026 and 2036.
The pace, on the other hand, differs.
While the Commission proposed a reduction of 10% each year, the EU Council wants a lower annual reduction in free allowances at the beginning, with a gradual acceleration of the reduction over the years.
According to a document obtained by EUROPE (the final text of the general approach was not yet available at the time of going to press), the approach adopted is as follows: an annual reduction of 5% from 2026 to 2028; 7.5% from 2029 to 2030; 10% from 2031 to 2032; 15% from 2033 to 2034; 20% in 2035.
This change follows an amendment proposal by Germany, which was supported by a number of Member States.
The European Parliament, for its part, had recently taken a stand in favour of a more sustained pace (see EUROPE 12977/12).
In addition, the general approach alleviates the conditions laid down by the Commission for obtaining these free allowances. In particular, the EU Council proposes to change the ratio allowing certain countries to grant additional free allowances to district heating installations in order to encourage the decarbonisation of this sector.
Another amendment to the CBAM would be that the Commission will be responsible for monitoring the impact of this mechanism, including on carbon leakage from exports, and assessing whether additional measures are needed.
It should be noted that the EU Council had already adopted its negotiating position on CBAM last March (see EUROPE 12911/14). However, Member States had agreed to address the issue of free allowances in the context of the revision of the ETS.
Strengthening the price stability mechanism
The general approach on the revision of the ETS further amends the provisions of Article 29a on measures to be taken in the event of excessive fluctuations in the prices of emission allowances in order to make its triggering automatic and more responsive.
Thus, as soon as the average price of allowances for the previous 6 months is 2.5 times higher than the average price of allowances for the previous 2 years, 75 million allowances will be released from the Market Stability Reserve (MSR).
At the ministers’ meeting, several Member States had called for a strengthening of Article 29a, notably Poland, Bulgaria, Latvia, Lithuania, Croatia, Slovakia and the Czech Republic.
Others, such as Denmark, Finland and Luxembourg, on the contrary, had asked not to change the current mechanism.
This led the French Presidency of the EU Council to propose an increase in the number of quotas released from 50 million to 75 million.
Inclusion of the maritime sector
With regard to the inclusion of emissions from the maritime sector in the ETS, the EU Council wants to delay the timetable proposed by the Commission by one year, but at the same pace. Emissions will thus be gradually covered: 20% of emissions in 2024, 45% in 2025, 70% in 2026, 100% from 2027 (see EUROPE 12762/1).
Recognising that Member States heavily dependent on maritime transport will by nature be more affected, the EU Council, on the other hand, introduced a new provision according to which 3.5% of the ceiling on auctioned allowances would be redistributed to these Member States. This is an increase from the previous draft compromise (2.5%).
The EU Council also wants to make some changes to the scope provided for by the Commission.
From 2024, non-CO2 emissions from ships should therefore be covered in Regulation (2015/757) on the monitoring, reporting and verification of CO2 emissions from the maritime transport sector (MRV Regulation). The EU Council also introduces a revision clause for the subsequent inclusion of these emissions in the ETS.
As regards the type of ships subject to the ETS, Member States agreed to apply the MRV Regulation also to small vessels (400 gross tonnage or more) from 2025.
The Commission would be required to submit a report, by 31 December 2026, examining the possibility of extending the ETS to such vessels.
In addition, the general approach takes into account geographical specificities and proposes transitional measures for small islands, winter navigation and journeys under public service obligation, while strengthening measures against the risk of carbon leakage in ports close to the EU (see EUROPE 12960/10).
ETS2
Unlike the European Parliament (see EUROPE 12977/10), the EU Council’s position on ETS2 remains quite close to the Commission’s initial proposal.
The main change is the timing. The general approach thus provides for the postponement of the auctioning of ETS2 emission allowances by one year (2027 instead of 2026).
The text also states that the new system will apply to distributors supplying fuels for consumption in the building and road transport sectors while introducing a selective participation clause for all fossil fuels.
In addition, Member States will have the possibility to exempt suppliers from the surrender of allowances until December 2030, if they are subject to a carbon tax at national level whose level is equivalent to or higher than the price of allowances in the ETS2.
Modernisation and Innovation Funds
In terms of the use of the revenues of the current ETS (ETS1), the EU Council maintained the increase in the volume of the Modernisation Fund through the auctioning of an additional 2.5% of the quota ceiling and the addition of new eligible sectors, as proposed by the Commission.
The general approach, on the other hand, extends the list of Member States benefiting from the Modernisation Fund. While the Commission planned for the auctioning of an additional 2.5% of the ceiling to be used to finance the energy transition of Member States whose GDP per capita is below 65% of the EU average in 2016-2018, the Council raised this percentage to 75%.
Natural gas projects will in principle not be eligible for the Modernisation Fund. However, the EU Council introduced a transitional measure allowing Member States already benefiting from the fund to continue to finance natural gas projects with regard to existing allocations, under certain conditions.
As regards the Innovation Fund, the EU Council has strengthened certain provisions to contribute to a better geographical balance of projects financed by this fund.
Member States also agreed to pay particular attention to the decarbonisation of the maritime sector with the possibility of launching dedicated calls for projects for the sector.
On the other hand, part of the revenue from the auctioning of allowances in ETS1 and ETS2 that was to be allocated to the Innovation Fund will be redirected to the ‘Social Climate Fund’ (see EUROPE 12982/7). (Original version in French by Damien Genicot)