On Friday 17th July, the European Commission published a proposal for EU Emission Trading System Review, with overarching themes being a relaxation of timescales and conditionality of extended free allocation (FA) entitlement. Headlines from the proposals include:
Relaxation of Climate Timelines
The Linear reduction factor (LRF) of available allowances will be lower, resulting in a shallower decline of allowances. – 3.7% 2031-2035 and 1.7% 2036-2040, reduced from 4.3% 2024-2027 and 4.4% from 2028
A lower LRF means free allocation entitlement will be extended. Under current rules, FA for most installations would end in the 2030s, these proposals would push that to past 2040.
Free Allocation Conditionality
From 2031, FA will depend on operators submitting verified decarbonisation investment plans, with 80% of allowances released upon plan approval, and 20% dependent on demonstrated emission reductions.
Increased EU ETS Revenue Availability
Member states will be required to allocate at least 50% of revenue from ETS allowance auctions to investments compatible to climate neutrality. Visibility and accountability of ETS revenue use are also due to be strengthened.
For businesses, funds will be made more available, with the establishment of the Industrial Carbonisation Bank. This will provide €100billion for industrial decarbonisation projects. €30billion of this will form the ETS Investment Booster, rewarding companies that invest ‘early’.
Integration of Domestic Carbon Removals
250Mt of permanent domestic carbon removals will be incorporated between 2031 and 2040 to encourage the development of a market that the European Commission see as essential to achieve climate neutrality. The EC stresses that emissions reduction will remain a priority and the amount of carbon removals that can be used in EUETS will be strictly capped and safeguarded in order to ‘preserve the environmental integrity of the system’.
Expansion of Scope in Maritime & Aviation Sectors, and into Energy from Waste
The EU ETS will lower the threshold for inclusion for maritime transport from 5,000 gross tonnage (GT) to 400GT, whilst considering the introduction of free allocation for companies using renewable fuels, electricity or wind propulsion.
From 2029, Aviation coverage will be extended to all flights, private and commercial, departing the EEA and landing in countries no further than 5000km from the geographical centre of the EU. This excludes all flights to the US and China
Municipal Waste Incineration will be introduced into the EU ETS with a phased approach from 2031 to 2034. IN 2031, operators will be liable to surrender allowances to cover 25% of verified emissions, 50% in 2032, 75% in 2033 and 100% in 2034 onwards. If a jurisdiction meets two of three conditions, it may be able to opt out. These are equivalent national carbon tax, on track for recycling targets or on track for landfill target
Reaction
The EU-emission-trading-system-review proposals have received a mixed reactions across industry and across national borders.
Early moving organisations that have already invested in cleaning up their operations have claimed they will be disadvantaged versus their fossil fuel reliant competitors, who would benefit from extended deadlines and financial help if these proposals are upheld. The proposals have been labelled as a ‘watering down’ and a ‘backtrack’ of an effective climate policy to ‘appease’ slow moving heavy polluters. It has been pointed out that the reduction in the LRF will permit an extra 2billion tonnes of carbon to be emitted when compared to previous trajectories.
Other industry commenters point to the proposals being a vital lifeline to business in a climate of high energy process and global competition.
Opinion on the proposed changes has been split amongst the bloc, with various ‘climate leaders’, such as Spain and the Nordic countries opposing the relaxation. On the other side, Italy, Poland and other central and eastern states believe the measure do not go far enough. The proposals are still required to be approved by EU member states, with the Commission aiming to reach agreement in early 2027.
It remains to be seen how this revision of the EU ETS will directly or indirectly affect the UK ETS . The link between the EU ETS and UK ETS is still on the cards, with the proposed 12th July summit postponed following Kier Starmer’s resignation.
Swan Energy ensures clients are are fully compliant with all the aspects of the EU ETS. If you would like to discuss this review further please get in touch.
