Some industrialists claim that the current architecture of the ETS adds pressure on the energy bills of emitting companies, which are now being severely tested by the war in the Middle East.
The first technical step was taken on Wednesday 1 April, with the official presentation by the European Commission of a revision of the market stability reserve. Initially, the aim is to ease up on the operation of this reserve of carbon allowances, set up in 2019, in order to rebalance the supply of and demand for allowances in circulation.
Allowances are automatically placed in or withdrawn from the reserve if the number of allowances on the market is above or below a given range.
In principle, by increasing the number of allowances in circulation, the price of CO2 falls, and so do companies’ energy bills.
The Commission’s new proposal tackles one mechanism in particular: the cancellation of surplus carbon allowances, once the market stability reserve exceeds 400 million units. The aim is to ensure that if prices are very high - as they were at the beginning of the year, when they approached €100 - there will always be enough certificates available to bring prices down.
“The earlier this proposal is agreed by the co-legislators, the more allowances will be saved from invalidation and the higher the firepower of the market stability reserve will be”, explained a European official.
On Wednesday, the price of these carbon allowances rose above €73, its highest level in six weeks, in reaction to the Commission’s announcement. Prices were also supported during March by the more general tensions on the energy market linked to the conflict in the Middle East.
More flexibility expected on the number of allowances in circulation. A review of the system as such will therefore take place in a second phase, between now and July, as confirmed by the President of the European Commission, Ursula von der Leyen, at the March European Summit (see EUROPE 13832/1).
For the time being, the Commission has not revealed its intentions regarding this revision, which has been called for by several Member States. While some, such as France and Germany, are publicly calling for a few technical adjustments to promote a more flexible system, others, such as Italy and Poland, want to go further (see EUROPE 13831/1).
An extension of the system beyond its scheduled end in 2039 is not out of the question, as one European official pointed out. The official also left the door open to a more flexible reduction curve for allowances in circulation ('linear reduction factor'), i.e. a smaller reduction in the cap on carbon allowances each year. This reduction over time was initially intended to encourage manufacturers to emit less.
In addition, carbon absorption and negative emissions are expected to be integrated into the ETS directive.
The deadline for the end of free carbon quotas could also be pushed back beyond 2034.
More free allowances for exposed sectors. However, before the details of this summer’s review are known, the Commission will present, within the next two weeks, an update for the period 2026-2030 of the benchmarks used to calculate the number of free allowances available to industrial sectors exposed to the risk of carbon leakage.
According to the Commission, after this update, free allowance levels would be on average 12% lower over the period 2025-2030 than in the previous five years, representing a reduction of around €25 billion over the five-year period.
The Commission is currently examining “what flexibility may be available to provide more generosity and free allowances than we initially anticipated without compromising the integrity of the Emissions Trading System”, as one European official pointed out.
Keen to reassure of its commitment to decarbonisation, the institution has also made it clear on several occasions that it is “maintaining the basic design” of the ETS, which has enabled domestic emissions in the EU to be cut by 39% between 1990 and 2024.
To see the proposal: https://aeur.eu/f/lfa (Original version in French by Pauline Denys)