After hours of discussions, lawmakers in the European Parliament and the Council have agreed, on December 17, to step up the carbon reduction target, under the EU Emissions Trade System (ETS), effectively obliging European citizens and businesses to pay more often for the CO2 they emit. The reform is part of the EU’s “Fit for 55” package, which is hoped to enable the bloc’s reduction of net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, and to achieve climate neutrality in 2050. Under the reformed market, some 10,000 factories and power plants will have to buy permits for emissions, in a move meant to encourage companies to adopt greener technologies to lower their carbon footprints.
A big step forward for our #EUGreenDeal 🌍— EU Climate Action (@EUClimateAction) December 18, 2022
We agreed with @EUCouncil & @Europarl_EN to strengthen the #EUETS & create a Social Climate Fund to:
🟢cut industrial emissions further & faster
🟢invest more in clean tech
🟢help the most vulnerable cope with the transition#FitFor55
The EU ETS, the world’s first major carbon market, is the foundation of the EU’s policy to combat climate change and it’s presented by the EU executive as a key tool for reducing greenhouse gas emissions cost-effectively. However, the impact of this reform will affect several civil and commercial sectors, which led the Eu to create new social energy fund to mitigate the impact of the energy transition on consumers.
“From 2027 on, its crunch time. Everybody needs to reduce emissions by then or will have to pay a lot,” said the Parliament’s lead negotiator Peter Liese, adding that he hoped this looming deadline would encourage investment in green energy.
1. EU ETS cut by 62%
After a long night, lawmakers agreed that emissions in the ETS sectors must be cut by 62% by 2030, compared to 2005 — a significant increase on the current 43% target. The co-legislators agreed to a rebasing of the overall emissions ceiling over two years of 90 and 27 million allowances, respectively, and to increase the annual reduction rate of the cap by 4.3% per year from 2024 to 2027 and 4.4% from 2028 to 2030. “Thanks to the agreement reached this weekend, we will increase our industry’s climate objectives by almost 50%,” said MEP Pascal Canfin, adding that the cost of CO2 will now be €100/tonne for industries, up from €80-85 currently.
Yet, NGO WWF was critical of the deal, saying it falls short of what is needed to keep the rise in global temperatures below 1.5°C.
This would have been a good deal ten or twenty years ago, but in 2022 it’s too little too late.Alex Mason, the WWF’s European Policy Office
“To fix this and to be sure the 2030 target is met, ETS sectors should reduce their emissions by at least 70%,” the WWF said in a statement.
2. Phasing out allowances
As part of the new deal, free quotas that were once granted to industries will also end as free allowances to industries in the ETS will be progressively phased out. The allowances will be gradually removed with almost half (48.5%) of the “pollution permits” dropped by 2030 and the allowances abolished completely by 2034. Moreover, the Carbon Border Adjustment Mechanism (CBAM), on which MEPs recently reached an agreement with EU governments to prevent carbon leakage, will be phased in at the same speed that the free allowances in the ETS will be phased out. The CBAM will start in 2026 and be fully phased in by 2034.
3. Addressing carbon leakage
By 2025, the European Commission will assess the risk of carbon leakage for goods produced in the EU intended for export to non-EU countries and, if needed, present a WTO-compliant legislative proposal to address this risk. In addition, an estimated 47.5 million allowances will be used to raise new and additional financing to address any risk of export-related carbon leakage.
4. Buildings and transport
As previously speculated, the latest deal envisages a separate new ETS II for fuel for road transport and buildings that will put a price on emissions from these sectors to be established by 2027. As requested by the Parliament, fuel for other sectors such as manufacturing will also be covered. In addition, ETS II could be postponed until 2028 to protect citizens, if energy prices are exceptionally high. Lawmakers also announced a new price stability mechanism that will be set-up to ensure that if the price of an allowance in ETS II rises above €45, 20 million additional allowances will be released.
5. Social Climate Fund
Finally, lawmakers agreed to establish a Social Climate Fund to support vulnerable households, micro-enterprises and transport users cope with the price impacts of an emissions trading system for the buildings and road transport and fuels for additional sectors. The fund would be part of the EU budget and fed by external assigned revenues up to a maximum amount of €65 billion.
🤝BREAKING🤝— ENVI Committee Press (@EP_Environment) December 18, 2022
EP negotiators have reached a deal with @EU2022_CZ & @TimmermansEU on a reform of the Emissions Trading System #ETS & the creation of new Social Climate Fund #SCF #Fitfor55 pic.twitter.com/qg7rNZRYgJ
“The agreement on the EU ETS and the Social Climate Fund is a victory for the climate and for European climate policy. This will allow us to meet climate objectives within the main sectors of the economy, while making sure the most vulnerable citizens and micro-enterprises are effectively supported in the climate transition,” said Marian Jurečka Czech minister for environment.