ETX Module: Ongoing EU ETS Revision
Policy context
The launch of the European Green Deal and the commitment to achieving a 55% reduction in emissions by 2030, have led to the revision of key climate and energy legislation in the EU.
One of the key EU climate policies, the reform of the EU ETS is one of the essential elements for the successful implementation of the EU Green Deal and the achievement of the 2030 climate target. Its revision is part of a large legislative package launched in July 2021 containing reforms of existing legislation as well as new policies.
Regulating around 40% of European emissions, the EU ETS is a crucial piece of the legislative package. An ambitious reform of this directive can yield deep emissions reductions in energy-intensive industries, the power sector and aviation.
The Commission’s proposal for its reform, launched in July 2021, included some improvements to the current legislation as well as important new elements, such as the inclusion of maritime emissions and the implementation of a separate carbon market for road transport and buildings. However, this proposal fell short of overall ambition and the proper application of the “polluter-pays” principle.
Key moments in the EU ETS reform process
Commission Proposal in a nutshell
- Have a one-off reduction of the overall emissions cap of 117 million allowances (‘re-basing’), and a steeper annual emissions reduction of 4.2% (instead of 2.2% per year under the current system).
- Strengthen the Market Stability Reserve (MSR): Maintain the MSR intake rate of allowances at 24% (instead of reducing it to 12%) until 2030 and cancelling allowances held in reserve above 400 million.
- Lay the ground for a more stringent benchmark revision and establish conditionality for free allocation
- Establish a new carbon border adjustment mechanism that will put a price on the carbon content of imports of a targeted selection of products to ensure that ambitious climate action in Europe does not lead to ‘carbon leakage’.
- Include Carbon Capture and Utilisation
- Extend emissions trading to new sectors by:
- including emissions from maritime activities in the EU ETS
- introducing a new, separate emissions trading system to cover emissions from fuels used in road transport and buildings. To address the social impacts of the extension of emissions trading to road transport and buildings, the Commission has also presented a proposal for a Social Climate Fund.
- Spend the entirety of MS revenues from the auctioning of emissions allowances under the EU ETS for climate action and the transformation of the energy system, including measures to decarbonise the road transport and buildings sectors.
- Increase the size of the Innovation Fund and the Modernisation Fund
