EU Commission proposes comprehensive reform of emissions trading

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The Revision of the ETS-Directive is part of the „fit-for-55“-package proposed 14th July 2021
Source: jorisvo / Fotolia.com

In order to achieve the EU's 2030 climate target, a reform of the EU Emissions Trading Scheme (EU ETS) is necessary. The amount of issued certificates is to be reduced and the financial support for climate protection measures expanded. In addition, maritime transport is to be covered by the EU ETS in future and a new emissions trading scheme for buildings and road transport is to be created.

On 14 July 2021, the EU Commission published a series of legislative proposals as part of the so-called "Fit for 55” package, which are intended to help reduce EU emissions by at least 55 percent by 2030 compared to 1990. Together with the German Environment Agency, Öko-Institute, adelphi and FÖS have summarized which adjustments are planned for EU ETS:

  1. Adjustment of Cap and Market Stability Reserve

    Emissions in the EU ETS are to be reduced by 61 per cent by 2030 compared to 2005. The linear reduction factor (LRF) is to be raised from the current 2.2 percent to 4.2 percent. In addition, there will be a one-off reduction of the cap in the year after the reform comes into force so that a linear reduction is achieved between 2021 and 2030.

    The Market Stability Reserve (MSR) is to be strengthened and adjusted: The doubled reduction rate -  24 per cent of the total number of allowances in circulation (TNAC) - will be maintained until 2030. New provisions will be introduced to avoid threshold effects. Aviation and maritime transport will be included in the calculation of TNAC. The amount of emission allowances held in the MSR will be limited to 400 million emission allowances.
  2. Expansion of financial support for climate change mitigation measures

    In future, Member States are supposed to use 100 percent of their revenues from the auctioning of emission allowances for climate change mitigation or social compensation measures instead of the current 50 percent. The European funds, modernisation and innovation funds, will be increased and expanded. In addition, a new "Social Climate Fund" will be created to cushion the social impacts of carbon pricing.
  3. Introduction of a Carbon Border Adjustment Mechanism

    To protect the energy-intensive industry against carbon leakage, i.e. the relocation of industrial production, investments and associated emissions abroad, a carbon border adjustment mechanism is to be gradually introduced. This would mean that certain energy-intensive basic materials and products imported into the EU from abroad would be subject to the same CO2 price as in the EU. In return, the current measures for carbon leakage protection, in particular free allocation, are to be gradually scaled back and terminated for these products.
  4. Adjustments to Free Allocation

    Although the free allocation for energy-intensive industry is to remain in principle, it is to be further reduced. The free allocation for aviation is to be phased out from 2027.
  5. Inclusion of Maritime Transport

    The scope of the EU ETS will be gradually extended to include maritime transport. Emissions from journeys within the European Economic Area (EEA) - i.e. EU, Norway, Iceland and Liechtenstein - and emissions at berth should be fully covered. Emissions from journeys arriving in or departing from the EU from abroad should be covered at 50 per cent.
  6. Reform of the Rules for Aviation

    In aviation, the level of ambition is to be increased through adjustments to the cap and to the share of free allocation. In addition, CORSIA will be implemented within the framework of the EU Emissions Trading Directive.
  7. Creation of a new emissions trading system for buildings and land transport

    A new emissions trading system, initially separate from the EU ETS, is to be introduced for emissions in road transport and buildings. Pricing will be based on an upstream approach, i.e. the distributors of fuels will have to surrender emission allowances for the emissions contained in the fuels.

These essential reform elements were summarised in a total of five compact factsheets. The factsheets on the topics "maritime transport", “road transport and buildings” and "aviation" will be published shortly.