The European Union Emissions Trading System (EU ETS) will be expanded to almost all sectors, in particular to the buildings and transport sectors. This was the agreement that was reached last night by the European Parliament, the Council and the European Commission in the course of the trilogue negotiations. Around three-quarters of all CO2 emissions generated in Europe will thus be tied to certificates, or emission allowances, in the future. This volume of emissions is steadily falling – in line with European climate targets.
This breakthrough finally places increased obligations on the whole of Europe, not least the challenging transport and buildings sectors. A market mechanism is designed to ensure that prices cannot rise too sharply and are offset if they exceed €45 per certificate. The EU has thus agreed on the central lever for reducing greenhouse gas emissions by 2030 and is paving the way to complete greenhouse gas neutrality by 2050.
said, “The EU is making headway on climate action and demonstrating determination – in spite of the many crises. European climate policy ensures that we in the EU broach the path to climate neutrality together and sets standards for the implementation of climate policy worldwide.”
To offset the financial burden of the additional carbon pricing for low income households, a new Social Climate Fund of €65 billion will be set up. Along with the Carbon Border Adjustment Mechanism and the strengthening of the Innovation Fund, the agreement also includes a good balance of the decarbonisation of European industry. It has been given more time for decarbonisation by 2030. Up until 2026, the Commission will review whether these rules might need amending.
The EU ETS agreement means a large part of the Fit for 55 programme has been negotiated. The programme includes all measures by which the EU Member States intend to reach their stricter climate targets – the CO2 emissions generated by the EU must be cut by 55% by 2030 (compared to 1990).
Federal Minister Habeck said, “From a German perspective, this agreement is a breakthrough in climate action, which simultaneously safeguards the competitiveness of European industry and cushions the social impact of necessary climate measures. The decisions taken as part of Fit for 55 are central to making the EU less dependent on fossil fuel. They demand a quicker transformation but also encourage the investment needed for this. In addition, the Social Climate Fund will ensure that the transition is socially balanced.”
Stricter rules for emissions trading
The trilogue agreement aims to gradually reduce the number of CO2 certificates – the emission allowances – in the European Union Emissions Trading System (ETS I) by 62% by 2030 (compared to 2005). The previous target was 43%. The rules for the free-of-charge allocation of emission allowances were also extensively revised. In particular, efficient businesses are to benefit from the free-of-charge allocation of emission allowances in the future, whereas inefficient facilities will have cutbacks to fear if they do not undertake any efficiency measures. The free-of-charge allocation of allowances for the aviation sector and for certain industrial sectors exposed to international competition is to be phased out. Also, maritime transport is to be included in the Emissions Trading System from 2024. This means that ETS I will then cover almost half of all European greenhouse gas emissions and the main sources of greenhouse gases that damage the climate: in the energy sector, in energy-intensive industry, and in maritime and air traffic.
Some of the revenue will feed into the Innovation Fund that is to support investments in climate-friendly technologies. Compared to the existing funding volume, an additional 20 million certificates have been added which will be gained, for instance, from the inclusion of maritime transport in ETS II.
New emissions trading system for buildings, transport and process heat
The agreement also provides for the creation of a new, additional and separate emissions trading system for buildings, road traffic and fuel in certain industries from 2027 – along the lines of Germany’s fuel emissions trading. There was success in including additional emission volumes in the EU ETS in the final moments of negotiations. The aim is to reduce the emissions covered by this scheme by 43% between 2005 and 2030. The volume of emission allowances is to fall by 5.10% each year, and by 5.38% from 2028. There are no plans to offer allowances free of charge as fuel traders are to pass on prices to consumers to generate the necessary incentives for climate action.
Social Climate Fund
The new Social Climate Fund is to provide Member States with funding to cushion the social repercussions of the proposed new ETS II. The fund will mainly support measures for and investments in more efficient buildings and lower-emission mobility. The measures are to primarily benefit low-income households, micro-enterprises and transport users. Temporarily, the fund can also finance direct income assistance for households at risk.
The fund amounts to €65 billion over a period from 2026-2032, and is financed for the most part from revenue from the new ETS II for buildings and road traffic. In addition, Member States will contribute to the implemented measures with their own funding so that a total of around €86 billion will be available for social re-balancing. A corresponding allocation key for the total funding will also ensure solidarity-based balance across Europe between all Member States.
Carbon Border Adjustment Mechanism
.As decided last week, a Carbon Border Adjustment Mechanism (CBAM) will be introduced from 2023 for a trial period of three years. The CBAM will price imports from non-EU countries that do not have comparable climate change mitigation requirements in place. The mechanism is to gradually replace the free-of-charge allocation of emission allowances – the main instrument which currently protects against carbon leakage – in the period up to 2034.
At the beginning, the CBAM will encompass the electricity sector and a large proportion of the emissions produced by the iron and steel, aluminium, cement, fertiliser and hydrogen industries. The number of products covered by the mechanism is to increase over time. Going forward, the mechanism will put a price on the carbon emissions of certain energy-intensive products imported to the EU. It will offset the burden imposed on European companies subject to ETS I, compared with companies from other economic areas.
Negotiations on strengthening the rules for renewable energy, energy efficiency and some transport related laws in the Fit for 55 package will be concluded in the coming year.
The compromise now reached aligns the positions of the Member States, the European Parliament and the Commission. Negotiations between the three institutions took the form of a trilogue. Only if all three parties agree can proposed legislation enter into force. The agreement also has to be formally confirmed by the Council and the European Parliament.