The EU's plan for a new carbon market
The European Commission announced sweeping changes to the EU emissions trading system on Friday, Europe's largest climate policy. It allows industries to emit CO2 for a longer period of time while providing more financial assistance to invest in clean technology.
What you should know
SPEED OF CO2 CUTTING
The European Union’s ETS forces power plants and large industries to purchase a permit for each metric ton they emit of CO2. It also caps the number of permits issued every year to ensure emissions are gradually reduced.
The Commission proposed a slowdown in the rate of decline. It lowered the "linear-reduction factor" from 4,3% to 3,7% by 2031, and to 1,7% in 2030. This will slow down the rate that companies must reduce their emissions.
If supply changes dramatically, the proposal would reduce the "market stability reserve's" ability to add or remove permits from the ETS by half, from today's 24%.
The two changes will allow industries to emit more CO2 in the future, as more permits are available for them to purchase. In addition, the EU will purchase international carbon offsets to cover 2% emissions reductions by ETS sectors starting in 2036. This will reduce the effort required of domestic industries. The Commission stated that the changes would'slow down' the ETS but were necessary to ensure the system met the EU climate goal of reducing net emissions by 90 percent in 2040. Around 40% of EU emissions are covered by the ETS.
FREE PERMITS
The Commission has proposed that heavy industries continue to receive free CO2 permits up until 2038 instead of 2034 when they are due to be replaced with the EU's carbon import border charges for sectors such as steel and cement manufacturing.
The EU has decided to delay the full implementation of the border carbon tax until 2038.
Free permits are not free. The Commission wants them to be 'conditional', giving 80% up front to companies who have plans to invest in Europe decarbonisation. The remaining 20% would be given to companies only when they have made the investments.
These conditions will not apply to the 10% most energy-efficient industrial installations as a reward for firms that invest in reducing CO2.
The EU has proposed to give more free permits than is currently planned by reducing "benchmark rate" which reduces these handouts every year from 2.5% to 2% in 2030.
The Commission announced that a separate fast-tracked proposal would also soften the benchmarks from 2026 to 2030 and give industries additional free permits in the amount of EUR6 billion ($6.86billion) for each industry.
Funding
Since 2013, the ETS has generated EUR260 Billion in revenue. The ETS has generated EUR260 billion in revenue since 2013.
The Commission has proposed that governments spend at least half of their future ETS revenue on domestic industries. This move is likely to be met with resistance by finance ministries, who use these proceeds to fill national budget deficits. The EU will also reserve 400 million carbon permits -- worth approximately EUR30 billion -- as an investment "booster fund" until 2030 to assist industries in investing in clean technology.
From 2031, industries will be able bid on a share of an additional EUR70 billion in?allowances to support investments in decarbonisation.
A fund that uses ETS revenue to invest in clean energy projects in the EU’s poorest countries will continue beyond 2030. 280 million permits of CO2 are allocated for this.
WASTE, PLANES, SHIPS
The Commission proposed expanding the ETS so that it would cover emissions for flights leaving Europe to destinations up to 5,107 km (3,107 mi) away. This move would include?trips from Europe to Dubai and Istanbul but not to the U.S.
The ETS is only applicable to flights within Europe. The EU has also proposed that emissions from ships with a gross tonnage of 400 would be added to the ETS. This is a reduction from the current 5,000 tons. It also proposes to give maritime firms 110 millions free CO2 permits which they can use to invest in cleaner fuels and ship technologies.
Emissions from incineration of waste will be gradually added to the ETS from 2031-2034. The ETS can be avoided until 2035 by countries that meet certain conditions, such as having a carbon tax or meeting EU recycling targets.
Next Steps
The EU and the European parliament will negotiate the final rules and propose their own changes. This process could take up to a year.
(source: Reuters)
