The European Commission has proposed changes to the ETS

The free allocation of allowances to companies will continue beyond 2030

On 17 July, the European Commission (EC) presented its long-awaited reform of the Emissions Trading System (ETS). This is stated in a press release from the institution.

“This revision will provide relief for industry, whilst maintaining the important role of the ETS in the climate and energy transition in line with the EU Climate Law,” the EC noted.

The European Commission has proposed setting the annual quota reduction rate (Linear Reduction Factor) at 3.7 per cent for 2031–2035 and 1.7 per cent for 2036–2040, compared with the current rate of 4.3 per cent. It is noted that this makes the trajectory more gradual and aligned with the EU’s domestic climate ambitions.

From 2036 onwards, the EU may allow the use of high-quality international carbon credits to cover 2 per cent of the emissions reductions required by ETS sectors.

The free allocation of allowances to companies will continue beyond 2030 and will be more closely linked to investments in decarbonisation in Europe. National revenues from the ETS must be reinvested in the relevant sectors covered by the system. In this regard, the European Commission has declared the principle that contributions from industry must be channelled back into industry.

The European Commission has proposed granting heavy industry enterprises, particularly in the steel and cement sectors, free carbon allowances until 2038. However, certain conditions are proposed. 80 per cent of the total allocation for each five-year period will be distributed annually in advance to companies that have plans to invest in decarbonisation in Europe. The remaining 20 per cent will be granted only after confirmation that these investments have been made.

A separate proposal on benchmarks aims to increase the volume of free allocation of allowances to industry by €6 billion for the period 2026–2030.

The Market Stability Reserve (MSR) will become more flexible: the proportion of surplus allowances withdrawn will fall from 24 per cent to 12 per cent, allowing allowances to remain in circulation for longer.

The EC proposes establishing an Industrial Decarbonisation Bank (IDB) with a budget of €100 billion to finance projects aimed at reducing emissions in industry and returning a larger share of ETS revenues to the sectors it covers. The ‘ETS Investment Booster’ programme, which will run until 2030, will kick-start the IDB’s operations – it provides for around €30 billion in support for companies investing in decarbonisation at an early stage as part of the Bank’s first phase of operations.

Since 2013, the ETS has generated €260 billion in revenue, 80 per cent of which has been returned to national budgets. According to EU estimates, only 5 per cent has been invested in industry. The European Commission proposes that governments spend at least 50 per cent of their future ETS revenues on industry.

EU Member States and the European Parliament are to put forward their own amendments to this proposal and ultimately establish the final rules.

It should be recalled that a number of European steel producers had previously called on the EU institutions to preserve the integrity of the Emissions Trading System (ETS) and to strengthen the Carbon Border Adjustment Mechanism (CBAM).