Source: Energy & Management Powernews , December 20 2022
The negotiators of the European Parliament and the Council of Ministers have agreed on more ambitious climate targets and the associated instruments.
The "Fit for 55" climate package, which the Commission presented in July 2021, includes four key elements: a faster reduction of the emissions cap in the European Emissions Trading Scheme (ETS), the introduction of a separate ETS2 for emissions from transport, buildings and small businesses, the formation of a Climate Social Fund (SCF) and the introduction of a border adjustment levy on imported CO2 (Carbon Border Adjustment Mechanism: CBAM).
The industry and electricity sectors covered by the ETS will have to reduce their CO2 emissions by 62 percent by 2030 (compared to 2005). This will be achieved through one-time reductions in the auction volume in 2024 by 90 million and in 2026 by 27 million. Tons. In terms of annual reductions in the auctioning volume (LRF), negotiators agreed on 4.3 percent in 2024-27 and 4.4 percent per year thereafter.
Maritime transport will also be included in the ETS, for the first time in 2024 with 40 percent of its emissions, and completely from 2026. Additional certificates will be made available for this accordingly.
Increase in the Innovation Fund
Waste incineration plants are to underpin their emissions with certificates from 2028. However, the details have not yet been finalized. Over the next few years, member states will have to submit the necessary data to the Commission, which is expected to make a proposal on the matter in 2026.
24 percent of the emission allowances will be put into the Market Stabilization Reserve (MSR), which is available to manage the ETS. Parliament was unable to enforce a reduction. The same applies to the cancellation of allowances that become dispensable as a result of the phase-out of coal. This is left to the member states.
In order to finance the investments that industry will have to make, the funds allocated for this purpose will be increased. The Innovation Fund will be increased from 450 to 575 million allowances, which would be just under 50 billion euros at today's ETS price. In principle, the funds are available to all member states, but are to be distributed proportionately among the regions of the EU. The modernization fund, which supports only the poorer EU states, will be increased from 2 to 4.5 percent of the auctioned emission rights.
All revenues of the member states from the auctioning of emission rights must in principle be spent on climate protection. However, they can also use it to finance their existing or planned programs, for example their national contributions to the SCF.
Stage-by-stage reduction in free allowances
Until recently, the introduction of the CBAM, which is intended to protect industry from competition from those countries that expect their companies to make less effort to reduce greenhouse gases, was controversial. The CBAM is now to be introduced in stages. In parallel, the allocation of free allowances will be cut:
- 2026 by 2.5 percent
- 2027 by 5 percent
- 2028 by 10 percent
- 2029 by 22.5 percent
- 2030 by 48.5 percent
- 2031 by 61 percent
- 2032 by 73.5 percent
- 2033 by 86 percent
- 2034 by 100 percent
The levies on imports of steel, cement, fertilizer, aluminum, hydrogen and electricity will be determined over the next three years and then increased at the same pace. The Commission was instructed to present an assessment before the introduction of the CBAM and possibly propose additional measures to avert the displacement of investments and jobs in the affected industries.
Introduction of a second emissions trading scheme
Despite considerable opposition from Parliament, it was also agreed to introduce a second emissions trading scheme for transport, buildings and smaller commercial enterprises. From 2027, suppliers will have to pay a levy on natural gas or fuels, which they will be allowed to pass on to their customers. The chairman of the environment committee, Pascal Canfin, assumes that this will make gasoline and diesel about 10 cents more expensive.
If energy prices in 2026 are still as high as they were in the spring of this year, the introduction of the ETS2 will be postponed for a year. In the event that the price in ETS2 exceeds 45 euros/ton, an additional 20 million certificates are to be auctioned. However, this price stabilization mechanism is only valid until 2030.
In order to avoid financially overburdening small businesses and socially weak households, the member states and the Parliament have agreed on the formation of a Social Climate Fund (SCF). Although its size is significantly smaller than the Parliament had demanded, at 87 billion euros it is larger than the member states had initially offered. Of this, 65 billion euros will come from the auctioning of certificates in the ETS2 and 25 billion euros from contributions by member states.
The fund will be set up in 2026 and initially financed from ETS revenues. It is limited until 2032, so that expenditures will be spread over eight years.
The SCF can be used, for example, to finance member states' programs to combat energy poverty, aid for small companies, or energy-saving measures.
Author: Tom Weingärtner
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