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29th May 2022

MEPs agree on future of emissions trading

  • Companies with installations have to hand in ETS credits for polluting. MEPs agreed on ETS rules for 2021-2030 (Photo: Otodo)

The European Parliament raised the bar on the EU's climate change commitments, after its environment committee on Thursday (15 December) broadly backed a more ambitious reform of the Emissions Trading System (ETS).

The proposal was adopted with 53 votes in favour, five against, and seven abstentions, and followed extensive negotiations between political groups over compromise amendments.

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The ETS is the bloc's flagship tool for reducing greenhouse gas emissions by at least 40 percent to 2030, but it has been plagued by consistently low prices for carbon credits.

The reform is aimed at jacking up the price by making the carbon credits, or allowances, more scarce over time.

Companies with heavy industrial installations need to annually hand in carbon credits, or allowances, for every tonne of CO2 they emit.

Leading MEPs were elated after the vote.

"Today's vote gives us a clear mandate for further negotiations with the council," conservative ECR group's Ian Duncan, rapporteur for the file, told EUobserver after the vote.

The reform needs approval from both the parliament's plenary and the EU Council, where national governments meet.

"It's a strong signal to the world that we are ready to live up to our commitments under the Paris Agreement," Swedish MEP Jytte Guteland, responsible for the report on behalf of the centre-left S&D group, added.

The price for emitting a tonne of CO2 stood at some €5 on Wednesday, while many experts think a price of around €30 is needed to persuade industrial companies to switch to cleaner energy sources.

The reform is the first major legislative file on fighting climate change since world leaders agreed the first-ever global climate treaty in Paris last year.

Reducing the available credits

The package is based on three key components.

A main issue of contention was the linear reduction factor (LRF), which says by how much the number of available carbon credits should decrease each year.

The parliament decided to raise the LRF from 2.2 percent, as suggested by the commission, to 2.4 percent. "This will allow to raise the price of a unit from €5 to €25," Guteland said.


It changed the distribution of carbon permits among the 13,000 companies working under the scheme, reducing in particular many of the privileges given to the cement industry.

It also set up a Just Transition Fund, which will help minimise social costs of the transitions towards a green economy.

"I very strong believe in climate policy and its capacity to generate green jobs, but some can feel insecure about the transition. The fund will help to prevent inequalities," Guteland said.

EPP objections

ETS is the world's first, and largest, carbon permit market.

The most controversial point of the report was the LRF, which was raised despite the objections of the centre-right EPP group, raising concerns about the support for the deal at later stages of the process.

"But in the end, the EPP also voted for the report, and the cap is just a small part of the deal," Ian Duncan said.

'Pretty ambitious' deal

European Commissioner on Energy Union, Maros Sefcovic, spoke to a handful of journalists in Brussels ahead of the vote.

He said the compromise deal that was on the table in Strasbourg was “pretty ambitious”.

Sefcovic also noted he was “very optimistic” that MEP negotiations with the national government, needed for the new ETS rules to come into force, will be wrapped up next year.

“We have to remember we are preparing the system for the period between 2021 and 2030, so I think we will definitely manage,” said the Slovak commissioner.

He noted that it was widely recognised that the emissions trading system was “technically fine”.

“But of course, €5 per tonne is not a price which can drive innovation and phase out the most polluting fuels. Something must be done.”

Next: China

Sefcovic met with journalists alongside Christiana Figueres, former top climate diplomat for the United Nations.

She also said she saw consensus “that putting a price on carbon is and would be the most effective policy” to reduce greenhouse gas emissions.

“When you put a price on anything, you are disincentivising. And that's what we want to do. We want to disincentivise any carbon-intensive energy uses,” said Figueres, who until July chaired the UN Framework Convention on Climate Change.

She noted that Europe's emissions trading system has inspired other nations in the world to also adopt a similar scheme.

Most notably, China will introduce its ETS next year.

“Once we have a price of carbon in China, you have to understand that what that means is that there is an embedded price in almost everything that we use,” said Figueres, noting that many of our consumer goods are made in China.

“There is going to be an embedded price on carbon in a huge portion of the global economy. That is going to have a ripple effect throughout the rest of our economies.”

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