Revision of the EU emission trading system (ETS)

In “A European Green Deal”

PDF version

On 14 July, as part of the 'Fit for 55' package, the Commission adopted a legislative proposal for a revision of the EU Emissions Trading System (ETS), to align it with the target of a 55 % reduction of EU net greenhouse gas (GHG) emissions by 2030, compared to 1990 levels.

The EU ETS was launched in 2005 and covers about 45 % of EU greenhouse gas emissions. The latest revision of the EU ETS Directive, adopted in 2018, sets the total quantity of emission allowances for phase 4 (2021-2030), in line with the previous EU emission reduction target (40 % reduction below 1990 levels by 2030).

The Commission proposal to amend Directive 2003/87/EC concerns the ongoing phase 4 of the ETS (2021-2030). It consists of five main elements:

  1. a reduced cap and more ambitious linear reduction factor for GHG emissions,
  2. revised rules for free allocation of allowances and the market stability reserve
  3. extension of the ETS to maritime transport
  4. a separate new ETS for buildings and road transport
  5. increase of the Innovation and Modernisation Funds and new rules on use of ETS revenues

To align the EU ETS Directive with the increased GHG emission reduction targets set in the European Climate Law, the Commission is proposing to reduce the emissions from the EU ETS sectors (including the extension to the maritime sector) by 61 % by 2030, compared to 2005 levels. To achieve this target, the proposal increases the linear emissions reduction factor from 2.2 % per year to 4.2 %.

The proposal would extend the EU ETS to cover CO2 emissions from maritime transport, specifically from large ships above 5 000 gross tonnage. The extension applies to all emissions from intra-EU voyages and to 50 % of emissions from extra-EU voyages and all emissions occurring when ships are at berth at an EU port. The same rules as for the other sectors would apply to maritime emissions. The requirement to surrender allowances would be gradually phased-in during 2023-2025 (20 % of verified emissions for 2023, 45 % for 2024, 70 % for 2025, and 100 % from 2026 onward). 

Protection against carbon leakage will still be in place through allocation of free allowances. However, the number of the free allowances will gradually be reduced with a decreasing emissions cap and the proposed introduction of a Carbon Border Adjustment Mechanism (see separate file).

Decision (EU) 2015/1814 establishing the ETS market stability reserve (MSR) would be amended to enable a smoother intake of allowances to the reserve. From 2023, allowances above the level of auction volumes of the previous year would be invalidated, and the number of allowances in the MSR would be limited to 400 million.

A separate self-standing emissions trading system for fuel distribution for road transport and buildings would be established starting from 2025. Because the GHGs are emitted by small entities like households and car drivers, the regulated activity will be ‘release for consumption’ and the regulated entities will be fuel distributors for whom a monitoring and reporting system already exists under the excise duty system of Council Directive (EU) 2020/262.The regulated entities would need to hold a GHG emissions permit and report the amount of the fuels placed on the market starting from 2024. From 2026, they would have to surrender a corresponding amount of allowances, based on the carbon intensity of the fuels. The cap on emissions would be set in 2026, based on data from the effort-sharing regulation. It would gradually decrease to amount to a 43 % reduction of emissions in 2030 compared to 2005 levels for these sectors, with a corresponding linear reduction factor. All allowances would be auctioned and none provided for free. Indirect social impacts from rising prices of road transport and heating fuels are addressed through a legislative proposal for a Social Climate Fund (see separate file).

The Commission presented separate legislative proposals for strengthening the ETS Market Stability Reserve and including aviation in the ETS (see separate files). In December 2021, the Commission presented a legislative proposal for a Council Decision amending the system of own resources of the European Union by adding new sources of revenue, including the EU ETS and the CBAM, complemented in March 2022 by a proposal for a Council Regulation on the methods and procedure for making available own resources based on ETS and CBAM.

The European Economic and Social Committee adopted an opinion (rapporteur: Stefan Back, Employers – Group I, Sweden) on the proposal on 8 December 2021.

In the European Parliament, the proposal has been referred to the Committee on Environment, Public Health and Food Safety (ENVI). Peter Liese (EPP, Germany) was appointed as rapporteur. On 14 July 2021, the ENVI Committee held an exchange of views on the on the Fit for 55 (Fit for 2030) package with Commission Vice-President Frans Timmermans.

The rapporteur presented his draft report in January 2022. The ENVI Committee adopted its report on 17 May 2022. It is scheduled for voting in the June I 2022 plenary.

In the Council, environment ministers held a first exchange on the ‘Fit for 55’ package at an informal meeting on 20 July 2021. The Environment Council held an exchange of views on the 'Fit for 55' package on 6 October 2021 and policy debates on 20 December 2021 and 17 March 2022.

On 18 May 2022, as part of the REPowerEU initiative, the Commission presented a legislative proposal that amends the EU ETS Directive and the MSR decision to auction €20 billion worth of allowances from the market stability reserve. The auction revenue would be made available to the Recovery and Resilience Facility.

References:

Further reading:

Author: Gregor Erbach, Members' Research Service, legislative-train@europarl.europa.eu

Visit the European Parliament pages on climate change.

As of 20/05/2022.
Glossary