The reform of the ETS system postpones climate objectives and broadens its scope, under pressure from manufacturers and in the face of soaring energy prices.
The European Union has announced an in-depth review of its carbon market, the Emissions Trading System (ETS), in response to growing pressure from manufacturers and soaring energy prices. “The announced revision will make it possible to spread the emission reduction objectives of the sectors concerned over a longer period, until 2048 instead of 2039.” This nine-year postponement marks a turning point in European climate policy, while the mechanism, in force for twenty years, had made it possible to reduce emissions from the sectors concerned by half.
This decision comes in a context of tensions between Member States, some, like Italy and Poland, pleading for a reduction in the system, while others, like Sweden or Spain, defend what they consider to be a “jewel” in the fight against climate change. The rise in energy prices, caused in particular by the closure of the Strait of Hormuz, has increased pressure on the European Commission to adapt the system.
Extension of free quotas and new incentives
The reform also provides for adjustments to the distribution of free quotas allocated to certain companies. “Certain companies have free quotas, the distribution of which will be extended from 2034 to 2038, while reducing.” A review of these deadlines is planned for 2033, allowing the system to be adjusted according to the progress made.
To prevent free quotas from slowing down decarbonization, the Commission is introducing incentive conditions: “The new free rights to pollute will be accompanied by incentive conditions linked to the emissions reduction projects of the companies that will benefit from them.” Climate Commissioner Wopke Hoekstra calls for a “more business-friendly approach” to “reward those who have invested in the fight against climate change”.
The reform also broadens the scope of application of the ETS. “The ETS system is extended to aviation and waste.” For aviation, the measure, the result of a compromise, will apply from 2029 to flights departing from the European Union up to 5,000 kilometers away. All private jets, whether they land or take off in the European Union, will also be taxed.
Brussels is also proposing to gradually integrate into ETS the sector of waste incinerators, which emit the equivalent of two-thirds of European aviation pollution. States may, however, benefit from an exemption until 2035 if they meet recycling objectives or already have an equivalent national tax.
New revenue sharing and support for decarbonization
The reform also modifies the use of revenues generated by the sale of rights to pollute. “Member States, which receive 80% of revenue from pollution rights, will have to devote half of this revenue to decarbonization in the future – compared to less than 10% today.” This plan will be associated with an industrial decarbonization bank, equipped with 100 billion euros of financing for energy-intensive industries.
The Vice-President of the Commission, Teresa Ribera, cites a balance sheet of 270 billion euros of investments in decarbonization, induced by the ETS.
A compromise under pressure and negotiations to come
The reform of the European carbon market is the result of a compromise between the need to preserve industrial competitiveness and the Union’s climate ambition. “Achieving zero emissions by 2039 is completely unrealistic for steelworks and cement plants, the chemical industry and especially for aviation,” warned German MEP Peter Liese, rapporteur of the law in the European Parliament.
Negotiations between co-legislators, Parliament and Member States will begin at the start of the school year. The Commission hopes for an agreement in the first quarter of 2027 for entry into force in 2028.
In the current system, polluting industries buy “rights to pollute” whose price varies, around 80 euros per tonne today. France, which benefits from a very carbon-free energy mix, has “no interest in its weakening”, according to Pascal Canfin. In March, Emmanuel Macron said he was open to “targeted adjustments”, while warning that questioning it would be a “strategic error”.
