The EU ETS in the era of the European Green Deal

A post by Isabella Alloisio


The European Union Emissions Trading Scheme (EU ETS) is the world’s largest ETS, covering about 5 percent of global greenhouse gases (GHG) emissions and 45 percent of EU emissions. Starting 2021, the linear reduction factor (the reduction rate of total quantity of allowances) will increase from current 1.7 percent to 2.2 percent. The steeper trajectory of the EU ETS cap will enforce a 40 percent reduction of regulated emissions by 2030, relative to 2005 levels.

This is in line with the EU Nationally Determined Contribution to the Paris Agreement but not with the more ambitious emission reduction objectives of the European Green Deal. The European Commission plans to raise the EU GHG emissions reduction target for 2030 to at least 50 percent, up from the current 40 percent, and this would imply a further tightening of the EU ETS cap in the fourth trading period (2021-2030).

In the words of President Ursula Von Der Leyen: “The European Green Deal should become Europe’s hallmark. At the heart of it is our commitment to becoming the world’s first climate-neutral continent”. The European Commission proposal for a Regulation enshrining the 2050 climate-neutrality objective in EU law aims to complement the existing policy framework, and positively interact and self-reinforce with the EU ETS. In order to achieve the 50 percent emission reduction target, by 30 June 2021 the EU will review all relevant climate-related policy instruments, including the EU ETS and its possible extension to other not yet regulated sectors.

All EU policies will contribute to the climate neutrality objective and all sectors will play their part. Under consideration is the extension of the EU ETS to the maritime sector as well as progressive reduction of free alowance allocation to the aviation sector concerning the already regulated intra-EU aviation emissions. However, the future regulation of the aviation sector will depend on the specific design of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) by the International Civil Aviation Organization (ICAO).

Moreover, in the framework of the Green Deal it has been proposed both introducing carbon pricing for the transport and buildings sectors and having them converge with the EU ETS by 2030. For example, in the road transport the Commission will consider applying the EU ETS as a complement to existing and future CO2 emission performance standards for vehicles, with a view to ensure a pathway towards zero-emission mobility from 2025 onwards.

Other proposed measures under the European Green Deal with significant implications for the EU ETS include a) the phase-out of coal, b) the ban of any remaining fossil fuel subsidies, and c) the (long due) review of the EU Energy Taxation Directive setting minimum tax rates on energy goods. Furthermore, the Commission intends to propose a carbon border adjustment mechanism for selected sectors, compatible with WTO rules,  to reduce the risk of carbon leakage and safeguard the competitiveness of European firms. This is intended as an alternative to the measures already in place within the EU ETS, namely the free allocation of emission allowances or compensation measures for the increase in the cost of electricity.

From a financial standpoint, the interlinkage between the EU ETS and the Green Deal is also strong. The most important link is constituted by the EU ETS Innovation Fund that will contribute to deploy large-scale innovative projects not only in the regulated energy-intesive industries (e.g., steel, chemicals, cement), but also in the resource-intensive sectors (e.g., textiles, electronics and plastics). Another self-reinforcing aspect is the proposal by the Green Deal to create a new revenue stream allocating 20 percent of the EU ETS auction revenues to the EU budget.

The European Green Deal is a clear statement of the EU intention to lead the implementation of ambitious climate policy and reaffirm the EU as a global “climate leader”. With a view to increasing the level of ambition of other major emitters, in the context of international negotiations, the EU emission reduction target could even be pushed towards 55 percent GHG emissions reduction by 2030.