The reform of the European Emissions Trading Scheme (EU ETS) is part of the so-called "Fit for 55 Package"and comprises the following core elements:
- Adjustment of the cap, the market stability reserve, free allocation and the use of auctioning revenues in the existing emissions trading system (EU-ETS 1).
- Introduction of a carbon border adjustment mechanism (CBAM)
- Inclusion of maritime transport in EU-ETS 1
- Reform of the rules for aviation (EU-ETS 1)
- Creation of a new emissions trading system for buildings, road transport and additional sectors (EU-ETS 2)
These changes will strengthen emissions trading as an instrument for achieving the EU's climate goals of reducing greenhouse gas emissions by at least 55 percent by 2030 and climate neutrality by 2050.
Core elements of the reform of EU ETS
1. Adjustment of the cap, the market stability reserve, free allocation and the use of auctioning revenues in the existing emissions trading system
Emissions in the existing EU-ETS 1 will be reduced by 62 percent by 2030 compared to 2005. To achieve this, the linear reduction factor (LRF) will be raised from the current 2.2 percent to 4.3 percent in 2024 and to 4.4 percent from 2028. Besides, the cap will be reduced by 90 million emission allowances in 2024 and by an additional 27 million in 2026, resulting in an overall linear reduction between 2021 and 2030. The Market Stability Reserve (MSR) will be strengthened, as the doubled intake rate of 24 percent of the total amount of allowances in circulation (TNAC) will be maintained through 2030. A smoothing mechanism will also be introduced to avoid threshold effects. Air and maritime transportation will be included in the TNAC calculation. The amount of emission allowances held in the MSR will be limited to 400 million emission allowances.
The free allocation for energy-intensive industry will remain in principle, but will now be linked in part to fulfilling conditions and reduced in particular for those industries covered by the CBAM. Aircraft operators will no longer receive a free allocation as early as 2026.
From now on, member states must use 100 percent of their revenue from the auctioning of emission allowances for climate protection measures or social compensation measures instead of 50 percent as before. The European modernization and innovation funds will be increased in volume and (the innovation fund) expanded in scope. In addition, a new "Social Climate Fund" will be created to cushion the social impact of CO2 pricing.
2. Introduction of a carbon border adjustment mechanism (CBAM)
To protect against carbon leakage, i.e. the relocation of industrial production, investments and associated emissions abroad, a border adjustment mechanism for the CO2 price of the EU-ETS 1 will be introduced. Energy-intensive basic materials and products imported into the EU from abroad will thus be subject to the same CO2 price as in the EU. In return, the previous carbon leakage protection measures, in particular free allocation, are to be gradually phased out for these products. As early as October 2023, importers of CBAM products will have to report on the emissions embedded in the imported products. From 2026, allowances for the reported emissions must also be purchased and surrendered at the price of EU allowances.
3. Inclusion of maritime transport in EU-ETS 1
The scope of the EU ETS 1 is extended to include the maritime transport sector. Emissions from voyages within the European Economic Area (EEA, i.e. EU, Norway, Iceland and Liechtenstein) and emissions in the port (berth) are fully covered. Emissions from voyages arriving in the EEA from abroad or departing from the EEA to abroad are covered at 50 percent. The inclusion of maritime transport will take place gradually from 2024 onwards. For the first reporting year, maritime shipping companies will initially only have to surrender allowances for 40 percent of verified emissions. This share increases to 70 percent in 2025 and finally to 100 percent from 2026 onwards. For the years 2024 and 2025, a corresponding amount is to be deleted from the auction volume for the emissions for which no allowances have to be surrendered.
4. Reform of the rules for aviation (EU-ETS 1)
The EU ETS 1 will also become significantly more ambitious in the aviation sector. This will be achieved on the one hand by significantly reducing the cap through the increased LRF, and on the other hand by rapidly phasing out free allocation by the end of 2025. In addition, the so-called non-CO2 effects of aviation will be included in the ETS 1 from 2025, initially through monitoring and later probably also with the obligation to surrender allowances. In addition, CORSIA will be implemented for flights to and from third countries under the EU Emissions Trading Directive in the EEA. Finally, there will be an application-based ex-post free allocation of a maximum of 20 million allowances for the use of sustainable fuels to partially compensate for the price difference compared with conventional kerosene.
5. Creation of a new emissions trading system for buildings, road transport and additional sectors (EU-ETS 2)
For emissions from road transport, buildings, and industrial and energy facilities that are not covered by EU-ETS 1 due to their size, a new emissions trading system will be introduced from 2027, initially separate from EU-ETS 1 (EU-ETS 2). Emissions must be reported as early as 2024. Similar to the national emissions trading system (nETS) already introduced in 2021, pricing will be based on an upstream approach, i.e., fuel distributors will have to surrender emissions allowances for the emissions contained in the fuels. The costs associated with this are passed on by the distributors to the end consumers, thereby creating incentives for climate-friendly behavior. The allowances are auctioned in full. The decisive factor is that the EU-ETS 2 will be equipped with a binding cap - the CO2 prices will thus be formed on the carbon market. This is a key difference from the nETS, which is being transferred to the EU-ETS 2. Emissions under the EU-ETS 2 will be reduced by 42% by 2030 compared to 2005. The implications of the EU-ETS 2 for private households are actively flanked by the above-mentioned Social Climate Fund and the use of national auctioning revenues for climate protection measures as well as social compensation measures.
Öko-Institut, adelphi and FÖS together with the German Environment Agency developed five factsheets explaining the main planned adjustments to the EU ETS, which will be successively posted on this page.