The EU’s emissions trading system (EU ETS), one of the world’s largest carbon markets, is the primary tool for reducing greenhouse gas emissions in the EU. This scheme establishes a price for carbon, which means that each year, entities subject to the ETS must acquire the corresponding rights for their emissions. Additionally, there is an annual limit on the traded emissions rights, which is progressively reduced.
This strategy creates economic incentives for companies to reduce their emissions. However, certain sectors exposed to “carbon leakage” receive free allocations of rights to maintain their competitiveness in the market.
How does the EU ETS contribute to the goal of climate neutrality?
The EU ETS covers approximately 40% of the EU’s total emissions and has already proven to be a key tool in reducing them. Since its introduction in 2005, emissions in the covered sectors have been reduced by 41%. The current reform of the EU ETS will drive further emission reductions, bringing the EU closer to its climate neutrality goal.
Which sectors are currently covered?
The EU ETS covers approximately 10 000 companies
- electricity and heat generation
- energy-intensive industry sectors (e.g. oil refineries, steel industry, cement, glass and paper production)
- commercial aviation (flights within the European Economic Area)
What will change with the reform?
More ambitious emission reduction targets will be established, with a new target of a 62% reduction.
There will be a faster reduction in the maximum emission limit, resulting in a lower quantity of emission allowances available in the market. Specifically, a decrease of 117 million emission allowances is expected over a two-year period. Additionally, annual reductions of 4.3% (2024-2027) and 4.4% (2028-2030) will be implemented, contrasting with the current 2.2% reduction.
The scope of the EU ETS will be expanded to cover new sectors. The inclusion of maritime transport will be gradually introduced between 2024 and 2026. Furthermore, a new separate ETS will be implemented for buildings, road transportation, and additional sectors.
The free allocation of emission allowances for certain sectors will be phased out gradually, concurrently with the introduction of the Carbon Border Adjustment Mechanism. This mechanism will establish a carbon price applicable to high-energy-consuming products imported to the EU, aiming to prevent carbon leakage and ensure fair competition.
Increased funding will be allocated to drive decarbonization efforts in the sectors covered by the EU ETS.
Up to €65 billion will be allocated to address the implications of carbon pricing in the proposed regime for buildings, road transportation, and additional fuel sectors. As part of this approach, a portion of the revenues generated from allocations in these sectors will be used to establish the Social Climate Fund. This fund aims to protect vulnerable individuals and businesses from the effects of carbon pricing in this new EU ETS system.
Source: European Council