The European Union has introduced proposals to modify its Emissions Trading System (ETS) aiming to provide businesses with more time to reduce their greenhouse gas emissions. This overhaul is part of a broader climate policy adjustment, seeking to align the ETS with the EU’s goal of reducing carbon emissions by 90% by 2040 compared to 1990 levels.
The proposed changes include extending the availability of emission allowances for certain industries until 2038, instead of the previously planned 2034, provided they commit to investing in decarbonization efforts. These adjustments are expected to undergo a lengthy approval process involving EU countries and lawmakers, which could take up to a year.
Balancing Industrial Needs and Climate Goals
The EU’s climate commissioner, Wopke Hoekstra described the new approach as more business-friendly and strategic. The European Commission, responsible for developing legislation for the EU’s 27 member states, asserts that these changes will ensure the ETS remains effective in achieving the EU’s climate objectives.
The ETS, established in 2005, is the EU’s primary tool for reducing greenhouse gases. It operates by requiring industries and power plants to purchase permits for each tonne of carbon dioxide they emit, thereby creating a financial incentive to adopt cleaner technologies. Companies can buy additional permits or trade them, and some businesses receive permits for free to help them compete with foreign firms that do not incur carbon costs.
Criticism and Support
The ETS has faced criticism from several member states, with Italy notably condemning the trading scheme as a de facto tax that has contributed to artificially high energy prices. Despite this, the system has been credited with reducing emissions by 47% by 2026 compared to 2005 levels.
Under the proposed changes, the rate at which the annual cap on emissions is reduced will be slowed to around 3.7% from 2031 and then to 1.7% from 2036, down from the current 4.3%. Additionally, free permits will continue until 2038, rather than ending in 2034 as previously planned. Companies will receive 80% of their free permits up front if they have plans to invest in decarbonization in Europe, with the remaining 20% distributed after the investments are made.
Expanding the ETS Scope
The EU also proposes extending the ETS to cover municipal waste, aiming to increase recycling and reduce incineration. Furthermore, the system will be applied to flights within a 5,000km radius of a central point in Europe, affecting airlines flying to North Africa and the Middle East but not to China or the US. This expansion avoids potential conflicts with the Trump administration.
For the first time, private jets will also be included in the ETS, ending a long-standing privilege for the wealthiest passengers. EU climate commissioner Wopke Hoekstra emphasized that the ETS is a valuable asset, noting that Europe would have consumed an additional 100bn cubic meters of gas without the scheme, making it more vulnerable to energy market volatility.
Industry and Environmental Reactions
Polish climate minister Paulina Hennig-Kloska expressed satisfaction with the proposed changes, stating that Poland would push for further weakening of the policy. However, Green politicians were less impressed. Michael Bloss, a German member of the European Parliament, criticized the plans, arguing that they would result in significant climate pollution and negatively impact the quality of life for future generations.
Camille Maury, a senior policy officer at WWF’s European policy office, warned that the proposed changes jeopardize a predictable and effective price on pollution, which businesses and investors need to invest in clean technologies. She compared the ETS to a Jenga tower, where removing building blocks destabilizes the entire structure.
The EU has been under heavy pressure to weaken the ETS as member states grapple with the latest energy shock triggered by the Iran war, exposing Europe’s dependency on imported fossil fuels. Italy has led the charge to scrap the ETS, joined by ten other member states calling for pragmatic reforms. In response, seven member states, including the Nordic countries, Spain, and the Netherlands, warned against watering down the ETS, as it risks undermining efforts to cut emissions.
