Key facts
- The European Commission's review of the EU Emissions Trading System (ETS) is scheduled for July 17.
- Proposals may extend the ETS cap trajectory into the 2040s, requiring a lower linear reduction factor (LRF).
- Changes to the market stability reserve (MSR) are also under consideration.
- The review aims to support industrial decarbonisation and competitiveness, potentially through adjusted free allowances.
- A €30bn clean energy investment booster is planned for 2027, funded by 400 million EUAs.
The European Commission is preparing to unveil its review of the EU Emissions Trading System (ETS) on July 17, a development anticipated to significantly shape European climate and industrial policy. The review has already influenced the ETS market, prompting extensive lobbying from various stakeholders.
Key considerations include extending the ETS cap trajectory, which currently aims for zero allowances by 2039, to continue issuing allowances "well into the 2040s." This would necessitate a reduction in the linear reduction factor (LRF), which dictates the annual rate of emissions cap decline. The LRF is currently set at 4.3% for 2024-27 and 4.4% from 2028. While the commission has not specified a new rate, it has indicated that drastic reductions would penalize early movers.
Some industry groups and policy advocates argue for maintaining the current trajectory until at least 2036, warning that a lower LRF would weaken the business case for industrial decarbonisation and shift the burden to sectors outside the ETS. Conversely, others suggest an LRF around 3.4%, aligning with an 85% emissions reduction target for 2040, rather than the overall 90% goal.
Modifications to the market stability reserve (MSR), designed to manage allowance supply and demand, are also on the agenda. These changes are expected to be rule and volume-based, rather than price-triggered, and are viewed by industry specialists as minor adjustments. A separate proposal to halt the automatic cancellation of ETS allowances and retain permits above the 400 million threshold will also be assessed.
The review aims to provide greater flexibility for hard-to-abate industries, potentially through adjustments to free allowance allocations and ensuring a portion of ETS revenues is reinvested in decarbonisation projects. The commission is considering a slower phase-out of free allowances for sectors at high risk of carbon leakage, which has raised concerns about reduced incentives for emission cuts.
Additionally, the commission plans to launch a €30 billion clean energy investment booster in 2027, financed by 400 million EUAs, to reward companies for emission reduction progress.