EU Parliament approves new Emissions Trading System

This plan is based on proposals of the "Fit for 55" package presented by the European Commission in 2021 to reduce the EU's net greenhouse gas emissions by 55 % compared to 1990 levels by 2030 and to achieve climate neutrality by 2050.

Adaptation of the EU Emissions Trading System (ETS)

Under the present agreement approved by the Parliament, sectors covered by the ETS (e.g. energy-intensive industry sectors, aviation, electricity and heat generation) are obliged to reduce their emissions even further. As stated in the provisional political plan, CO2 levels in these sectors are required to drop by 62 % compared to 2005 levels by 2030.

To achieve these ambitious goals, the newly approved deal introduces a reform of the ETS. Under the current ETS, energy-intensive industries and the power generation sector can purchase so-called "free allowances" to cover their carbon emissions. Under the new regime, the maximum number of free allowances is planned to gradually be reduced by 4.3 % per year from 2024 to 2027 and 4.4 % from 2028 to 2030, resulting in higher costs of polluting in Europe.

In addition to the ETS reform, a Carbon Border Adjustment Mechanism (CBAM) will be established. Starting from 2026, the CBAM will impose a levy on imports of high-carbon goods such as steel, cement, aluminium, fertilisers and hydrogen. As the Council and the Parliament agreed to end free allowances for these sectors over a nine-year period between 2026 and 2034, the CBAM aims to prevent the shift of emission production to non-EU states as well as the protection of EU industries against more polluting foreign competitors.

There are other adaptations too, such as the inclusion of maritime shipping emissions into the scope of the EU ETS as well as the establishment of a new, separate ETS for the buildings and road transport sector and the use of fuels in other, as yet undefined, sectors.

The Social Climate Fund

The EU Parliament and Council further agreed to establish a Social Climate Fund to help Member States cushion the impact of the newly established ETS for the buildings and road transport and fuels in additional sectors. The fund will reach approximately EUR 65bln funded from the revenues generated by the ETS and should support vulnerable households, micro-enterprises and transport users from 2026 to 2032. While it was agreed that the fund would benefit all Member States, each will still have to contribute nationally from their own budgets.

Outlook

For the final deal to be published and thus enter into force, both the EU Parliament and the Council must give their approval. As the latter is still pending, the exact measures and numbers under this deal are still to be determined.

authors: Nina Zafoschnig, Theresa Busta