The European Commission has published its long-awaited Emissions Trading System (ETS) review, proposing the free emissions allocations reduction be slowed and the phase-out extended beyond 2034 until 2038. Moreover, Members States will be required to spend 50% of their national ETS revenues on investments to decarbonise ETS sectors, Kallanish notes.
Free allocation distribution will be extended beyond 2030, but will from 2031 become conditional upon operators developing Invest in EU Decarbonisation Plans and investing an amount equivalent to 100% of the value of their free allocation into decarbonisation in the EU.
The total number of EU ETS emissions allowances, otherwise known as the cap, will meanwhile see an adjustment in the reduction trajectory from 2031, meaning allowances will continue to be issued into the 2040s. The Linear Reduction Factor (LRF) has been updated to 3.7% for 2031-2035 and 1.7% for 2036-2040.
The current LRF of 4.3% (4.4% from 2028-2030) was agreed as part of the 2023 ETS reform to deliver the EU’s 2030 climate target. “Simply maintaining that rate beyond 2030 would not provide a realistic trajectory for the period up to 2040. It would reduce the ETS cap to zero around 2040, going beyond what is required under the European Climate Law,” the European Commission says.
“The proposal maintains the environmental integrity of the EU ETS while providing a more predictable and manageable investment framework for industry over the longer term,” it adds.
The Industrial Decarbonisation Bank (IDB) will provide €100 billion in decarbonisation project funding. In the first phase, the Investment Booster will provide an estimated €30 billion of support for 2028-2030, financed through 400 million ETS allowances. It will accelerate investment before 2030. Projects will be supported on a first-come, first-served basis, while ensuring dedicated access for lower-income Member States.
Moreover, the use of high-integrity international credits will be permitted from 2036, as set out under the European Climate Law. A facility will be established to purchase these credits to create additional emissions space in the EU ETS of up to 2%.
The Market Stability Reserve will be made more dynamic, with its parameters adjusted to the shrinking market after 2030. The rate at which it absorbs allowances will drop to 12% from the current 24%, a change that will mean more permits can stay in the market for longer.
The ETS is nevertheless “not the main driver of electricity prices”, the Commission points out. “Electricity bills are determined primarily by the cost of supplying electricity, network charges, and national taxes and levies. The biggest structural driver of high and volatile electricity prices remains Europe’s dependence on imported fossil fuels, particularly gas.”
Announced alongside the ETS review, the Commission’s Electrification Action Plan targets better use of electricity grids, better design network charges, deployment of smart meters and flexibility solutions, and aligning electricity taxation with the EU’s electrification objectives.
The EU Council and Parliament must finalise their positions on the ETS proposal by the end of this year so that the trilogue can begin in January, according to Peter Liese MEP, the European Parliament’s lead negotiator on the ETS reform.
