The European Carbon Market – 30.01.2023

The New EU ETS Reform

Right now, the existing EU ETS covers around 40% of the EU’s emissions (energy sector, industrial installations and aviation).

Its scope is being extended to include maritime transport. Maritime transport will be the newcomer and large vessels of 5,000 gross tonnage and above must gradually surrender emission allowances (EUA) for an increasing share of their emissions: 40% in 2024, 70% in 2025 and 100% in 2026. The inclusion of smaller vessels and non-CO2-emissions such as methane and N2O will likely start from 2026 onwards.

On top of that, the overall ambition of EU ETS emission reductions until 2030 compared to 2005 is increased from initial proposed 55% to 62%.

The agreement in the EU Parliament was reached on 18th of December 2022 and it would lead to about 23 million tons less CO2-emissions compared to the EU Commission’s proposal from 2021 and is much more aggressive than the minus 43% that has been the previous reduction target.

To achieve this stronger reduction of 62%, the legislators agreed on a rebasing of emissions:

·      90 million EUA are taken out of the market in 2024 with another 27 million EUA following in 2026;

·      The entire European mission cap will be reduced by 4.3% annually from 2024 to 2027;

·      From 2028 onwards this linear reduction factor (LRF) will rise to 4.4%.

·      The market stability reserve (MSR) will continue to take out 24% of surplus EUAs.

All these reductions will lead to significantly tighter supply of EUAs, drive prices in the next years and shall incentivise more decarbonisation especially in industrial sectors. This brings us to the changes for the industrial sector.

Fundamental change is also coming to the industrial sector, in particular the phase-out of free allocations of EUAs. From 2026 onwards, the number of free allowances handed over to industries will be reduced gradually until 2034 when industries have to procure all of their needed allowances through the auctioning mechanism or on the market.

Next to those sectors that are already under the EU ETS, a lot of emissions from other activities in the EU are not part of an emission pricing scheme. After much uncertainty about its prospects, it is now clear: a new or second emission trading system (EU ETS II) will be implemented as well for buildings and the transport sector, starting from 2025.

Source: EnergyPost.eu