The European Parliament approved several major climate policies on the 18th, paving the way for achieving the EU's carbon reduction targets. First, the ETS will phase out free carbon emission allowances. Meanwhile, the Carbon Border Adjustment Mechanism (CBAM) will be introduced in 2026 to increase carbon tariffs on imported products such as iron, steel, and cement. A second carbon trading market is expected to be established in 2027, covering emissions from buildings and transport. Finally, the EU will establish a new social climate fund to reduce the energy and transport burdens of the poor.
These bills are primarily based on the agreement reached between the European Parliament and EU member states at the end of last year (2022). Although they must be voted on by member states before they are officially adopted, they are not expected to undergo significant changes.
EU carbon trading market gradually eliminates free quotas, carbon rights prices rise
The series of bills passed by the European Parliament are part of the EU's massive climate change plan, "Fit for 55", which aims to reduce net greenhouse gas emissions by 55% by 2030 compared to 1990 levels.
The European Parliament overwhelmingly approved the reform of the EU's carbon trading market, with 413 votes in favor, 167 against, and 57 abstentions. The carbon trading market primarily regulates power generation and industrial plants. Under the polluter-pays principle, these plants must purchase carbon credits to offset their emissions. The new rules require these sectors to reduce greenhouse gas emissions by 62% by 2030 compared to 2005 levels, and will phase out free carbon allowances between 2026 and 2034.
Reuters reported that carbon emissions from sectors covered by the carbon trading market have decreased by 43% since 2005. Furthermore, driven by expectations, the price of carbon credits in the European carbon market has reached 94 euros per metric ton, nearly four times the level at the beginning of 2020. In February of this year, the price even exceeded 100 euros per metric ton.
In addition, the European Parliament voted to establish a new carbon trading market for the transport and building sectors, ETS 2, in 2027. This comes with the condition that if energy prices are exceptionally high in 2027, the launch date will be extended to 2028. The European Parliament also voted to include the shipping sector in the carbon trading market, requiring it to pay for its emissions starting in 2024. In the aviation sector, free quotas will be phased out by 2026 to encourage the use of sustainable aviation fuels.
CBAM will be gradually introduced starting from 2026
As expected, the European Parliament passed the CBAM, a matter of great concern to Chinese citizens, with a overwhelming majority. Under the CBAM, importers of products such as iron, steel, cement, aluminum, fertilizers, electricity, and hydrogen must pay the difference between the carbon price in the producing country and the EU carbon market price. In other words, this puts European and foreign products on a relatively equal footing, ensuring that European products do not lose competitiveness due to Europe's carbon fee. The CBAM will be implemented gradually from 2026 to 2034, coinciding with the phase-out of free allowances in the EU carbon trading market.
EU establishes social climate fund to reduce energy poverty
The EU plans to establish a Social Climate Fund (SCF) in 2026 to ensure that poorer groups with less electricity consumption and lower carbon emissions do not bear disproportionately high energy and transportation costs during the climate transition. The fund is expected to total €86.7 billion, of which €65 billion will be raised through the auctioning of carbon emission allowances under the ETS II program, with the remaining 25% to be paid by national governments.
Source: Environmental Information Center (https://e-info.org.tw/node/236563)
