On Friday 17 July, the European Commission presented its long-awaited revision of the CO2 Emissions Trading System (ETS), together with its action plan for the electrification of the European economy (see EUROPE 13912/6).
The ‘ETS’ system is the European carbon market, which covers emissions from most industrial sectors as well as aviation and maritime transport. It has been rolled out in four phases since its launch in 2005, and the revision is intended to align it with the European Union’s climate target of reducing emissions by 90% by 2040 (compared with 1990 levels), as provided for in the European Climate Law.
According to the European Commissioner for Climate, Wopke Hoekstra, this revision makes it possible to reconcile climate action with European reindustrialisation based on a clean economy, while shielding European companies from unfair competition from companies outside the EU.
A weakened emissions reduction pathway. The linear reduction factor, which determines the number of emissions withdrawn from the European carbon market each year, will be amended as of 2031. It was planned for this factor to be 4.3% a year from 2024 to 2027 and 4.4% a year from 2028 to 2030. From 2031, it will be 3.7% a year until 2035, then it will fall to 1.7% as of 2036.
In practical terms, this means that instead of reaching almost full decarbonisation of the 10,000 European industrial installations subject to the ETS in 2039, this will be achieved around 2048.
Against all odds, Commission adds flexibilities. Despite the unpopularity of this measure, both among scientists and climate protection organisations, the European Commission has decided that the ‘ETS’ system will include, from 2036, 2% international carbon credits (or 260 million tonnes of international credits) and carbon capture and storage technologies.
This means that European installations struggling to decarbonise their activities will be able to offset them through activities covered by carbon credits abroad or through capture and storage technologies (BioCCS and DACCS).
The safeguard measures for international carbon credits are the same as those introduced by the European Climate Law, meaning that they comply with the principles of Article 6 of the Paris Agreement, in particular to avoid double counting. An assessment will have to be carried out no later than 1 January 2033.
As for carbon capture and storage technologies, the European Commission’s objective is to facilitate the creation of a market for approved technologies. An assessment is scheduled before 31 December 2034.
No substantive change in use of ETS revenues. One of the recurring issues with the ETS is that the revenues received by Member States through this mechanism (that is, 80% of the total according to the Commission) are not necessarily reused for the purpose they are meant to serve, namely industrial decarbonisation. The revision therefore provides for 50% of ETS revenues received by Member States to be redirected towards investments in the decarbonisation of installations subject to this tax.
Under the consolidated ‘ETS’ Directive of 2023, 100% of the revenues had to be redirected towards investments in these two areas. The Commission is now proposing a list of appropriate investments for ETS revenues.
Funding and solidarity. An industrial decarbonisation bank will be set up as of 2030. With a budget of €100 billion, it will serve as a tool to decarbonise European industry. Between 2027 and 2030, an ‘investment booster’, endowed with 400 million allowances (or €30 billion at the current price of €75/t of CO2), will serve the same purpose.
Part of these allowances, distributed on a first come, first served basis, will be reserved for the 12 Member States with the lowest GDP. In addition, 10% of the rights from ETS auctions will be paid to lower-income Member States, which may use them under the ‘Modernisation Fund’ or in priority spending areas.
Extension of scope. The European Commission has decided to include waste incinerators within the scope of the ETS gradually between 2031 and 2034, except in the outermost regions (from 2035). Derogations may be requested by Member States that have taken equivalent measures.
In addition, substantial changes have been added in the aviation and maritime transport sectors (see EUROPE 13912/4).
More free allowances, but subject to conditions. Companies whose activities are subject to the ETS will continue to receive free emissions allowances after 2030, but subject to conditions.
According to the text of the revision, the company will receive 80% of the free allowances distributed on the basis of the ‘benchmarks’ of its production each year, on presentation of a decarbonisation investment plan adopted by the Board of Directors. Once the investments have been made, the company concerned will receive the additional 20% of free allowances, subject to publication of its investments and reduction of its emissions.
However, the top 10% of best-performing companies will not be subject to these conditions in order to reward pioneers.
A revision clause has been introduced. If a company had received free allowances and then decided to relocate its production abroad, it would be required to repay the free allowances allocated to it. The aim is to encourage investment in European infrastructure and to combat carbon leakage, in other words relocations abroad.
The verification system will be handled by Member States, but there will also be one-stop shops at European level able to verify sectoral compliance. However, verification at European level will only be carried out on an aggregate basis, and not installation by installation.
Market Stability Reserve, benchmark values, fertiliser prices. Other amendments have been introduced concerning: - the Market Stability Reserve, so that the increase in the price of carbon credits is more gradual (see EUROPE 13912/2); - the benchmark criteria allowing the allocation of free allowances to installations subject to the ‘ETS’ system (see EUROPE 13912/3).
Some provisions of the legislative revision, notably on the use of revenues by Member States, may affect the agricultural sector, which is not subject to the ETS. Specific measures are planned for the fertiliser sector, which is subject to the Carbon Border Adjustment Mechanism (CBAM) (see EUROPE 13912/5).
The Commission hopes for a decision by the co-legislators in the first quarter of 2027.
Read the revision proposal: https://aeur.eu/f/my6 (Original version in French by Nadège Delépine)