Early on Sunday morning (December 18), EU negotiators agreed on a reform of the European Emissions Trading System (ETS), the world’s largest carbon market and the EU’s most important climate policy instrument.
The ETS currently caps emissions from around 10,000 factories and power plants and allows those who have excess allowances to make a profit by selling carbon allowances on the market.
The scheme is now being extended to other sectors of the economy to meet the EU’s 2030 climate target – a commitment to reduce carbon emissions by a net 55 percent before reducing them to zero by 2050.
“This agreement will make a major contribution to combating climate change,” said Peter Liese, CDU MEP who led the negotiations on behalf of the European Parliament.
“The EU is leading the way in climate protection and is showing determination – despite all the crises,” said Federal Climate Minister Robert Habeck (Greens).
“From a German perspective, the agreement is a breakthrough for climate protection, which at the same time ensures the competitiveness of our European industry and the social cushioning of necessary climate measures,” he added.
Liese once more emphasized that following the negotiations, the reformed EU emissions trading “covers almost all economic sectors” following it was decided to expand the system to include emissions from maritime transport, waste incineration and other companies.
According to today’s agreement, the sectors covered by the emissions trading system must reduce their emissions by 62 percent below 2005 levels by 2030 – a significant increase from the previous target of 43 percent.
“Reforming emissions trading is an important part of the Green Deal,” said Pascal Canfin, a French Liberal MEP who chairs the European Parliament’s Environment Committee.
“Thanks to the agreement reached this weekend, we will increase our industry’s climate targets by almost 50 percent,” he said.
According to Canfin, the CO2 price in emissions trading following the reform will be around 100 euros instead of the previous 80-85 euros. “No other continent in the world has such an ambitious carbon price,” he said.
Separate emissions trading for buildings and road traffic (ETS2) will also be created.
This second emissions trading system is to apply from 2027 and will be accompanied by a social climate fund that is intended to compensate households for the additional costs incurred. Should energy prices be exceptionally high, the new system will be postponed by a year to 2028.
CO2 tariff
A key bone of contention in the negotiations was maintaining the competitiveness of sectors such as chemicals, cement and steel, which currently receive most of their carbon credits for free – an incentive designed to help them decarbonise and invest in green technologies .
The system has been heavily criticized by environmental groups, who have argued that big polluters are reaping huge profits from the system without making the appropriate green investments.
Under today’s agreement, free allowances will be phased out entirely by 2034 and almost halved (48.5 percent) by 2030.
They will be gradually replaced by a new CO2 tariff at the EU border designed to protect European companies from importing cheaper products from countries with lower environmental standards. The new so-called border adjustment (CBAM) will initially apply to imports of iron and steel, cement, aluminium, fertilizers and electricity as well as hydrogen.
The deal also provides additional funding for industry, including a larger innovation fund for forward-looking investments in green technologies and a modernization fund to support industry in low-income EU countries.
In total, almost 50 billion euros will be available to boost innovation and accelerate the decarbonization of companies, according to Canfin.
To protect EU industry from wild swings in carbon prices, 24 percent of all ETS allowances will be placed in a market stability reserve that will release carbon allowances to cool the market if carbon prices rise too high.
In the European Parliament, the agreement is supported by all groups, with the exception of the right-wing extremists, said Liese. The Christian Democrat EPP, the Social Democrat S&D, the liberal Renew Europe, the Greens and the conservative ECR group all support them.
The tentative deal now needs to be confirmed by EU member states and the European Parliament, which will hold a plenary vote in January or February, Canfin said.
environmental organizations disappointed
The environmental organization WWF criticized the agreement announced this morning. It falls short of what is needed to keep global temperature rise below 1.5°C.
“This would have been a good deal 10 or 20 years ago, but in 2022 it’s too little and too late,” said Alex Mason of WWF’s European Policy Office. “To fix this and ensure the 2030 target is met, ETS sectors should reduce their emissions by at least 70 percent,” WWF said in a statement.
The WWF was particularly critical of the agreement on the free allocation of emission certificates to industry, since the pace of reduction is far too slow and a complete phase-out will not take place until 2034.
“The free allocation of emission certificates is made dependent on investments to increase energy efficiency. If a company does not meet the requirements, it still receives a full 80 percent of the free allowances previously allocated,” according to the WWF.
Climate Action Network (CAN) Europe, another NGO, echoed those criticisms, but also welcomed lawmakers’ drive to require EU governments to use 100 percent of their emissions trading revenues for climate-friendly investments.
“EU countries now have to spend all their emissions trading money on climate action, and that’s definitely a step forward,” agreed WWF’s Romain Laugier. “Unfortunately, it is up to the Member States how they spend on climate protection measures. That means they might carry on as they are and use some of that money to subsidize fossil coal and gas,” he said.
Green MEP Michael Bloss defended the deal, saying it will incentivize investments in green technologies.
“The free pollution party is over, we are sending the industry on a modernization course,” said Bloss, recalling that free allowances are to be almost halved by 2030 and completely abolished by 2034.
“The worst polluters pay extra and those who decarbonize are supported,” said the German MEP.