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26th Jun 2022

MEPs raise ambition on EU carbon market reform

  • Heavy industry will continue to receive free permits worth an estimated €400bn between now and 2030, according to Carbon Market Watch (Photo: Astrid Westvang)
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The European Parliament environment committee on Tuesday (17 May) agreed on reform of the European carbon market — including its expansion to buildings and transport.

The EU's emissions-trading system (ETS) limits emissions in the power sector, manufacturing industry, and airlines operating in Europe.

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Within this limit, companies can then sell and buy emissions allowances for every emitted tonne of CO2 — establishing a carbon-pricing tool that acts as an economic incentive to reduce pollution.

MEPs increased the ambition of the European Commission proposal by backing a 67-percent reduction target in the ETS sectors, compared to 2005 levels.

The committee also agreed to expand the ETS scheme to cover shipping emissions from 2024 and to accelerate the phase-out of free allowances in a bid to speed up the decarbonisation of industries like cement, steel and chemicals.

"This compromise is good for the climate, jobs and people in Europe … Those that continue to pollute without investing will have a hard time," said lead centre-right MEP Peter Liese.

Under the ETS, free permits are designed to help industry players remain competitive against rivals based in non-EU third countries and to prevent the so-called 'carbon leakage'.

But free allowances have become a hotly-debated issue — with previous reports casting doubts on their efficiency and compatibility with the 'polluter pays' principle.

MEPs agreed that all sectors covered by the new carbon tax, or Carbon Border Adjustment Mechanism (CBAM) to give it its official name, will have to gradually phase out free allowances before 2030 — five years before the EU Commission proposal.

For aviation, the committee voted to phase out the sector's free emission allowances in 2025, instead of 2027, as proposed by the EU commission.

"Setting up the CBAM will thus finally allow us to fully respect the polluter-pays-principle," said Dutch socialist MEP Mohammed Chahim who is leading negotiations on this file.

Nevertheless, heavy industry will continue to receive pollution-free permits worth an estimated €400bn between now and 2030, according to Carbon Market Watch.

The CBAM was initially going to apply only to the iron, steel, cement, fertiliser, aluminium, and electricity generation sectors, but MEPs want to extend its scope to organic chemicals, polymers and hydrogen — and to all ETS sectors before 2030.

The committee has also agreed to introduce a new ETS for road transport and buildings, differing significantly from the commission's proposal.

The committee said that the scheme should only apply to commercial vehicles and buildings until 2029.

But such system would also be expanded to cover private cars and heating and cooling from residential buildings — if certain conditions are met after an impact assessment is carried out by the commission.

Although this timeline aims to protect vulnerable households from current skyrocketing energy prices, others argue that there is no reason to exclude wealthier households from this scheme.

"As it currently stands, the scheme will have a marginal impact on emissions and risks becoming hard to implement in practice," said  Elisa Martellucci, a campaigner from Carbon Market Watch.  

Additionally, EU lawmakers agreed that all ETS revenues from this new system will be used to finance the Social Climate Fund. This fund aims at supporting vulnerable households in the energy transition.

The EU parliament will vote on the CBAM file and on the ETS file in June before entering into negotiation with EU member states.

EU agency warns ETS emission-cuts are off track

The European Environment Agency warned current projections indicate emissions-reductions in member states covered by the EU's cap-and-trade carbon market are insufficient to meet the bloc's new climate targets for 2030 and 2050.

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