EU agrees revised ETS for 2021-30

Coinciding with the UN Climate Summit COP23 in Bonn later this month, EU negotiators have agreed a revised Emissions Trading System (EU ETS) for the 2021-30 trading period.

Following a two-year intensive negotiation process, the agreement builds on the Commission’s approval and includes the following main improvements agreed by Parliament and Council. Significant changes to the system will be made to speed up emissions reductions and strengthen the Market Stability Reserve to accelerate the reduction of the current oversupply of allowances on the carbon market. To achieve the minimum 40 per cent EU target, sectors covered by the ETS will have to reduce their emissions by 43 per cent compared to 2005. As a result, the overall number of emission allowances will decline at a rate of 2.2 per cent annually from 2021 onwards (compared to 1.74 per cent presently). This amounts to an additional emissions reduction in those sectors of some 556Mt over the decade. 

In addition, extra safeguards will be implemented to provide European industry with extra protection, if needed, against the risk of carbon leakage. The proposal also aims to improve its rules to address carbon leakage through revising the free allocation system for the 50 sectors at the highest risk of relocating their production outside the EU with more flexible rules to better align the amount of free allowances with production figures and update the benchmarks to reflect technological advances since 2008. It is expected that some 6.3bn allowances will be allocated for free during the decade.

Furthermore, several support mechanisms will be put in place to help the industry and the power sectors meet the innovation and investment challenges of the transition to a low-carbon economy, including an Innovation Fund and a Modernisation Fund.

While further executive measures on relevant parameters still need to be adopted, the deal contributes to predictability and legal certainty for businesses. The European cement association, Cembureau, had hoped for a stronger signal towards best-performing plants that their investments will be honoured through a full protection against carbon leakage. Moreover, the association remains concerned about the impact of a cross-sectorial correction factor. However, it is pleased that "the legislator has stood its ground against any attempt to differentiate between sectors in applying the rules of the ETS scheme," said Cembureau in a statement.

"The cement sector puts a strong emphasis on innovation both in its manufacturing process and in its downstream products and is pleased to see that the innovation fund will be instrumental in incentivising that innovation, especially in relation to breakthrough technologies such as CCS/CCU. Several projects are currently being undertaken in the sector to improve its environmental performance, reduce CO2 emissions and improve energy efficiency," it added.