The EU Commission plans to present its proposals for amending the European Emissions Trading System (ETS) on Friday. It intends to address demands from industry and numerous EU member states that have been calling for relief measures for months. Here is the background:
How does the European carbon price work?
The EU sets a cap on the total amount of carbon dioxide (CO2) that certain sectors are permitted to emit. These sectors include steel and aluminum production, the chemical industry, electricity and heat producers, and fertilizer manufacturers. Companies are required to purchase CO2 allowances—also known as pollution rights—and can trade them with one another.
The price of CO2 fluctuates and currently stands at around 80 euros per tonne. Those who emit less benefit, while those with high emissions pay a premium. To ensure emissions fall and prices rise, the number of available allowances is also reduced annually. Under current legislation, this figure is set to drop to zero by 2040, though the Commission could now extend the timeframe.
Why does the ETS disadvantage European companies?
Manufacturers producing steel outside the EU do not have to purchase CO2 allowances—unless the country of production has a similar system in place. Consequently, foreign manufacturers do not incur these costs, allowing them to sell their products at lower prices. The EU therefore has a vested interest in preventing its companies from relocating or being forced out of the market.
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How is the EU addressing this problem?
To date, the EU has been allocating free CO2 allowances to manufacturers in sectors facing intense international competition—such as the steel and chemical industries. However, these free allowances drive down the price of CO2, effectively undermining the EU’s climate efforts.
The plan was for this system to be phased out by 2034 and gradually replaced by an import levy on carbon-intensive goods from countries lacking an equivalent emissions trading system. This measure aims to ensure that foreign companies face the same costs as their European counterparts. However, the proposed levy has also drawn criticism, and the allocation of free allowances could potentially be extended.
Who receives the free allowances?
Companies that emit the least amount of carbon dioxide per tonne of finished product. To determine this, the European Commission establishes reference values—or “benchmarks”—for each industry. These benchmarks are designed to reflect the performance of the top 10 percent most efficient companies in a sector; all others incur additional costs.
These reference values are adjusted every few years to keep pace with technological advancements. During the most recent adjustment earlier this year, the Commission took into account concerns raised by the industry, modifying the values to make them easier for sectors like the chemical industry to meet.
What else might change?
The Commission could propose including additional sectors in the emissions trading system. The waste management industry is a prime candidate, as waste incineration plants release significant amounts of carbon dioxide. The Commission could also extend emissions trading to international flights departing from the EU; currently, only intra-European flights are covered. Airlines oppose such a move.
What about heating and fuel?
Under current legislation, the EU is set to introduce a second emissions trading system in 2028 covering carbon dioxide emissions from buildings and transport. This “ETS2” has long been a bone of contention for countries like Poland and the Czech Republic, as it could significantly drive up prices for consumers there. The second emissions trading system has already been postponed once and could fall victim to the negotiations as “collateral damage.”
What are the next steps?
The review of the emissions trading system scheduled for Friday was mandated by law but has become a political issue due to pressure from the industry. Once the EU Commission presents its proposals, they will move to negotiations within the European Parliament and the Council of the 27 EU member states. However, these deliberations are unlikely to gain momentum until after the summer break and are expected to take several months.
Author: AFP – jhm/pe
Sources: AFP Press Portal