The European Commission proposed several important changes to the EU Emissions Trading System (EU ETS) in March after recent pushback from industry over rising costs.
The EC – the carbon market’s regulator – outlined four measures aimed at easing the cost pressures on industry, which has come amid an energy crisis sparked by US and Israeli attacks on Iran.
In the short-term, the EC will propose updated benchmarks for free allocation of carbon allowances to address industry’s concerns, President of the European Commission Ursula von der Leyen said in a statement on 19th March. This is likely to take the form of more generous benchmarks that will help ease compliance costs for CO2-intensive industries across Europe such as metals, refining, cement and chemicals producers.
Second, the EC will reform the Market Stability Reserve to make it more responsive to carbon price volatility, von der Leyen said. The MSR is a separate pool of carbon allowances introduced in 2019 that can automatically withdraw or release allowances in response to shifting demand – effectively acting as a mechanism to mitigate extreme carbon price moves.
Then in the longer-term, the EC plans a ‘more realistic’ trajectory for free allocation of carbon allowances beyond 2034. This may take the form of a longer phase-out of free allowances than had originally been planned under the EU ETS.
And finally, the EC proposed a Eur30 billion decarbonisation fund, described by von der Leyen as an ‘ETS Investment Booster’. The fund will be financed by 400 million carbon allowances under the EU ETS, and will provide funding for decarbonisation projects.
The latest proposed changes come in the context of an upcoming review of the EU ETS, and also come in the wake of strong pushback against the carbon market by several EU member states and industry groups.
A row blew up earlier in March over the EU ETS as Italy and some key industry groups called for the bloc’s carbon pricing system to be weakened or even suspended amid worries over industrial growth in Europe.
Italian Prime Minister Giorgia Meloni called for a temporary suspension of the EU ETS, in a bid to reduce the cost burden on heavy industry, against a backdrop of an energy crisis triggered by the ongoing conflict in the Middle East.
In particular, the Italian government is concerned over the cost of producing electricity using fossil fuels, which are particularly exposed to carbon prices in Europe.
What to make of the latest proposed changes?
What the EC’s response shows is that some sections of EU industry are feeling the pinch at a time when energy supplies are at risk, driving up the cost of doing business, and it also demonstrates a willingness by the EC to respond to industry’s concerns.
Such amendments to the EU ETS legislation have happened before, and future changes are inevitable too.
However, an actual suspension of the carbon market in Europe is highly unlikely. The EU ETS is a cornerstone of the EU’s policy framework that covers energy, industry and environment and represents one of the most cost-effective ways to reduce emissions at scale.
The EU ETS helps drive innovation by placing a price signal on the balance sheet of emissions-intensive industries and creates a mechanism for generating funding for innovative clean technology.
However, it is also true that when conditions become difficult for industry, carbon pricing systems can come under attack from those most exposed to them.
The latest political row and proposed changes to the EU ETS do little to change the fundamental picture: it has never been more important to understand and manage carbon emissions.
Companies need to understand their exposure to carbon pricing policies such as the EU ETS, the EU’s Carbon Border Adjustment Mechanism (CBAM), and the UN’s CORSIA program for international aviation emissions.
Moreover, companies that are proactive in managing their emissions can also capitalise on the opportunities on offer under the voluntary carbon market and the emerging carbon markets under the Paris Agreement.
Developing a solid grounding in carbon markets is the first step in understanding the risks and opportunities that lie ahead, as governments develop and expand carbon pricing systems worldwide.
To find out more about the EU’s long-term climate targets, read this article: EU nations agree 90% emissions target for 2040 – CarbonwiseAnd check out our Visual Learning asset that helps illustrate how cap-and-trade systems work here: How the EU ETS Works – Carbonwise.
