Brussels, 20 March 2023 (TDI): The European Parliament has voted in favor of rolling out an ambitious plan for reducing industrial carbon emissions. The EU’s emissions trading system (ETS) aims to cut emissions significantly by 2030.
The European Union is the world’s third-largest CO2 emitter. The new Emission Trading Scheme pursues the aspiring climate target of cutting emissions substantially by 2030 and bringing them down to net zero emissions by 2050.
The emission trading system was initially launched in 2005 as part of the Fit for 55 packages. It is one of the tools set by the European Union to reach climate change goals.
The scheme is based on the polluter pays principle which obligates 10,000 power plants and factories to hold a permit for each tonne of CO2 that they emit. This principle provides a financial incentive for the industrial units to spread less pollution.
The motto of the scheme is the less you pollute, the less you pay. The companies usually must buy permits through auctions and the price is affected by demand and supply.
However, some of the permits are allocated for free, particularly in sectors at risk of having companies move production to other parts of the world with laxer emission constraints.
After the 2008 financial crisis, the price of the permits dropped due to less demand while the supply remained constant.
With large surpluses and low prices, companies were discouraged from investing in green technologies, thereby hampering the emission scheme’s effectiveness and competency in combating climate change.
To deal with this issue, the EU created Market Stability Reserve in 2015 to better align the supply and demand of allowances by placing 24% of all emission trading scheme allowances in a reserve, from where they can be released in case of shortage.
The March 2023 agenda extended the Market Stability Reserve to 2030 intending to protect the EU against falling CO2 prices due to external reasons such as the pandemic.
The lower prices for C02 may illustrate less of an incentive for the industry to cut greenhouse gases.
The European Union agreed in December 2022, on an update of the scheme, to cut industry emissions to 62% by 2030 to align with higher reduction targets.
The revised version of the ambitious goals of the deal includes the following:
- Further decreasing the number of annual allowances available until 2030 to cut emissions by 62% by 2030, one percentage point more than the Commission proposal (61%).
- Increased financing for innovative technologies and modernize the energy system via an Innovation Fund and a Modernization Fund.
- A share of revenues from the new trading system will be allocated to the Social Climate Fund, which aims to support households and businesses affected by energy poverty.
- The phasing out of free allowances to the industry by 2034, while the EU’s Carbon Border Adjustment Mechanism will simultaneously be phased in and fully operational by 2034.
- The mechanism would apply a carbon price to imported goods from less ambitious countries and prevent companies from moving production to a country with less stringent greenhouse gas emission rules.
- Extension of the scheme to include maritime transport
- The inclusion of emissions from municipal waste incineration installations from 2024.
- The creation of a separate emissions trading system (ETS II) for commercial buildings and road transport as of 2027. Private transport and residential buildings would be added only from 2029 and would require a new Commission proposal.
Furthermore, all revenues from the Emission Trading Scheme should be exclusively earmarked for climate-related endeavors.
Once the members of the parliament and the European Union reach a consensus on the revised goals, Parliament is expected to vote on it in April 2023.