The European Commission on Friday proposed a sweeping overhaul of the European Union’s Emissions Trading System (ETS), giving heavy industry more time to cut carbon dioxide emissions and greater financial support for investment in clean technologies within Europe.
The ETS is the EU’s principal instrument for combating climate change. It requires power plants, industrial facilities, airlines and shipping companies to buy allowances for their carbon emissions while imposing an overall ceiling that declines over time.
The Commission has been preparing the overhaul for some time. The plan is intended to carry the system into the coming decades and align it with the EU’s 2040 target of reducing net emissions by 90%.
It also responds to pressure from industry and member states including Italy and Poland, which argue that the current rules are damaging European competitiveness.
Brussels is attempting to balance those concerns against warnings, including from Spain, that relaxing the system would penalize companies that have already invested in cutting emissions.
Under the proposal, the annual reduction in the ETS emissions cap would slow from the current 4.3% to approximately 3.7% from 2031 and 1.7% from 2036.
More Free Allowances – with Conditions
The European Union gives some carbon allowances to industrial companies free of charge to help them compete with producers in countries where climate rules are less stringent. Benchmark EU allowances were trading at approximately €79 ($90) per metric ton of carbon dioxide when the proposals were announced.
The new rules would enable companies to receive more free allowances for longer, provided they meet certain conditions.
Companies that submit plans to invest in decarbonization in Europe would receive 80% of their free allowances upfront. The remaining 20% would be released only after the investments had been made.
The Commission also wants free allocations to continue until 2038, four years longer than originally planned. The extension would apply to sectors including steel and cement production.
Since 2013, the ETS has generated €260bn ($297bn) in revenue. Brussels now wants tighter restrictions on how that money is spent, requiring at least 50% of future proceeds to be reinvested in decarbonizing industries covered by the system.
The measure may face resistance from governments that use ETS revenue to plug holes in their public finances. Ten member states, including Poland and Italy, opposed parts of the plan this week, among them the requirement to link free allowances to investment in emissions reductions.
EU governments and the European Parliament will negotiate the final shape of the reform over the coming year.
Climate Backlash Complicates Reform
The long-awaited overhaul comes amid growing political resistance to Europe’s climate agenda. Under pressure from industry, Brussels has already relaxed environmental requirements for carmakers and farmers.
Other governments have urged the European Union not to dilute the ETS, partly because doing so would force politically sensitive sectors such as agriculture and forestry to reduce emissions more rapidly.
The system covers 40% of the European Union’s emissions. Emissions from the sectors it regulates have fallen by half since 2005.
The proposal would also extend the ETS to smaller ships and to international flights from Europe to destinations within 5,000 km of the continent’s geographic center.
Flights to transit hubs in Turkey and the Middle East would therefore be included, while those to the United States would remain outside the system.
The American Chamber of Commerce warned this week that extending the ETS to international flights risked “potentially provoking retaliatory measures from key international partners”.
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