The European Parliament and the Council of Ministers reached an agreement on December 18th to recalibrate the bloc’s Emission Trading System, commonly known as the carbon market or ETS, further restricting pollution allowances for industry. EU policymakers also agreed to allocate billions of euros for the creation of the Social Climate Fund.
The cap-and-trade emissions regulation system, which puts limits on the amount of certain pollutants industries can give off and allows them to trade and buy emissions rights, is the EU’s frontline ‘climate change’ strategy and a cornerstone of the “Fit for 55” green deal package it hopes will reduce carbon pollution 55% by the year 2030 relative to 1990 levels.
The political agreement, still to be ratified in parliament and by the leaders of the 27 member states, sets the goal of reducing carbon pollution by energy producers and other targeted industries by 62%, one percent over the European Commission’s original proposal and well above the 40% reduction already achieved, since the carbon market was first introduced in 2005, according to the Commission.
Most significantly, though, the pact adds buildings and transportation to the ETS by subjecting providers of heating and transportation fuel to the carbon market starting in 2027, although according to a parallel system. In the agreement, the ‘ETS-2’ would be put on hold should natural gas prices surge above €106 per megawatt hour on the benchmark TTF hub. In that case, implementing the scheme would be delayed by one year to 2028. Additionally, if ETS-2 permit prices rise above €45 per ton, credits will be added to the system to lower prices, though that provision lasts only until 2030.
Maritime shipping was also added into the ETS in the agreement and waste incineration facilities will be considered for addition in the next year.
The other significant change under the agreement is the phase-out of free emission credits, replacing them with the Carbon Border Adjustment Mechanism (CBAM), a carbon tariff on certain imports, specifically cement, aluminium, fertilisers, electric energy production, hydrogen, iron, and steel, as well as some of their precursors and downstream products. Both mechanisms are designed to keep EU industries competitive with foreign competitors. Free carbon allowances will be phased out between 2026 and 2034.
To protect EU exports, the pact gives member states the possibility of providing additional support to companies at risk of being harmed by the phaseout of free permits.
The pact dictates that all revenue generated from the ETS be spent on “climate action.” The political agreement also includes a Social Climate Fund worth €86.7 billion to be spent between 2026 and 2032.
“The fund will be used by member states to finance measures and investments to address the impact of carbon pricing on vulnerable citizens and micro-enterprises,” the European Council explained in a statement.
To receive money from the fund, member states will have to submit a ‘social climate plan’, outlining how they will protect vulnerable households from the impacts of the increased carbon taxes. The EU will pay up to 37.5% of the estimated total costs of each country’s climate welfare plan and allows for temporary direct income support.
Czech Minister for Environment Marian Jurečka said, following the negotiations:
The agreement on the EU Emissions Trading System and the Social Climate Fund is a victory for the climate and for European climate policy. This will allow us to meet climate objectives within the main sectors of the economy, while making sure the most vulnerable citizens and micro-enterprises are effectively supported in the climate transition. We can now safely say that the EU has delivered on its promises with ambitious legislation, and this puts us at the forefront of fighting climate change globally.
Conservative MEPs had opposed the changes, particularly the elimination of free carbon credits.
ECR shadow rapporteur Hermann Tertsch (VOX) said in a December 13 statement:
With the zeal shown in Brussels to save the world with green policies, we are in danger of forgetting ourselves and the foundations of our prosperity. CBAM is nothing more than an additional levy, the cost for which will ultimately have to be borne by EU customers. In uncertain times like these, with skyrocketing inflation, such a levy is unjustified … Operators need legal certainty and predictability in times of economic crisis—not reforms. The agreed-up mechanism creates additional complexity for market operators.
