Key facts
- The EU has proposed reforms to its Emissions Trading System (ETS) that critics say could hinder carbon emission cuts.
- The proposed changes include extending free carbon permits for industries until 2038.
- From 2031, free allowances will only be available to companies that commit to investing in decarbonisation in Europe.
- Investors believe the new rules could enhance corporate accountability by linking free permits to decarbonization investments.
- Concerns exist that the overall weakening of the ETS constraints might offset the new accountability measures.
The European Union has proposed reforms to its Emissions Trading System (ETS), a key policy aimed at reducing greenhouse gas emissions. The proposed changes, which include extending free carbon permits for industries until 2038 and making them conditional on decarbonization investments from 2031, have drawn mixed reactions. While investors see the new measures as a way to enhance corporate accountability and ensure companies invest in green initiatives, climate experts and some investors express concern that the overall weakening of the ETS's constraints could impede progress towards climate targets.
Under the proposal, companies would receive 80% of free allowances upfront if they submit credible decarbonization plans, with the remaining 20% contingent on actual investment delivery. Failure to meet these milestones could result in permit withdrawal. This shift aims to provide a clearer view of companies' genuine investment in a low-carbon economy, moving beyond voluntary ESG disclosures. However, the success of these reforms hinges on whether the new accountability measures are robust enough to offset the potentially weaker carbon pricing incentives.
The EU's broader goal with these reforms is to reinvigorate its industrial base and encourage investment within Europe, competing with the United States and China. The final changes to the ETS will be negotiated by EU countries and the European Parliament over the next year, with potential alterations to the Commission's proposal.