EU negotiators sealed a provisional agreement to strengthen the EU-ETS rules for industrials
Negotiators from the European Commission, the Parliament and the Council of Member States met last week for two days of closed-door talks to reconcile their respective positions to strengthen the EU-ETS rules for industrials, following the reforms that hit the aviation and shipping sector earlier this month. The final agreement for industries postpones part of the efforts towards the end of the decade, in order not to hamper economic recovery, but ensuring a slightly higher emission reduction target for 2030 than originally proposed.
The new emissions reduction target by 2030 for EU-ETS sectors has been raised to 62% compared to 1990 levels a considerable step up from the current target of 43% by 2030. To meet the new emission reduction target, the ETS cap has been revised downwards, with a removal of 90 million allowances in 2024 and a second cut of 27 million allowances in 2026. In addition, the Linear Reduction Factor (LRF), which cuts the supply of allowances from auctions and free allocation, will increase from the current 2.2% to 4.3% in 2024-27 and then to 4.4% in 2028-30.
The review of the Market Stability Reserve (MSR) - which controls the surplus of carbon allowances in the EU-ETS - has remained unchanged from the Commission's original proposal. If the total number of allowances in circulation exceeds 833 million, the MSR absorbs 24% of the total auction volume scheduled for the following year, but if the number of allowances falls below 400 million, the MSR increases the volume of the auction by 100 million allowances.
The legislators also confirmed an earlier agreement to improve Article 29a of the ETS directive which sets the rules for intervening in the market in the event of excessive price spikes. The new text provides for the release of 75 million EUAs from the MSR via auctions during a six-month period, if the average EUA reference price for a consecutive six-month period increases by more than 2.4 times the average price of the previous two years.
An issue that sparked fierce debate is the replacement of free allocation of carbon allowances to industrials deemed at risk of “carbon leakage” (at risk of delocalization if the carbon cost becomes too expensive in EU) by the Carbon Border Adjustment Mechanism (CBAM), a tax on carbon-intensive products at EU borders. The parties agreed to gradually phase-out free allowances starting in 2026 with a 2.5% reduction, to a full phase-out in 2034. However, negotiators have not yet managed to address one of the industry's main concerns: providing support to exporters who will gradually see their products become less competitive than those produced in countries that apply no carbon price. By 2025, the Commission should assess the risk of carbon leakage risk for EU goods produced for export and present a WTO-compliant legislative proposal to address this risk.
Finally, new sectors should be joining the EU-ETS soon. The negotiators agreed to bring waste emissions into the EU-ETS, after a four-year measuring period (2024-2028) that gives the Commission some time to assess the impact of bringing this sector in the system, in particular the risk of seeing an increased usage of landfills. Emissions from road transport and building heating should be covered by a separate ETS system (called simply ETS-2) which should start in 2027 and operate separately from the existing EU-ETS, although EU sources said that lawmakers may seek to link or combine the two systems in the future to have a unique European carbon scheme with a single price.
The current agreement is informal and has to be approved according to the rules of procedure of each of the institutions. First the Council of member states needs a qualified majority to agree, and then the full Parliament has to approve it, potentially at the beginning of next year.