On the 18th, representatives of the European Parliament and EU member states reached an agreement on major reforms to the EU ETS (European Union Emission Trading System). The agreement will gradually reduce carbon emission quotas, resulting in a 62% reduction in carbon emissions from ETS-covered sectors by 2030 compared to 2005 levels. Furthermore, the EU will launch a new carbon trading market for buildings and road transport, "ETS 2." The new agreement will not officially take effect until it is approved by the European Parliament and the European Council.
Carbon market quotas reduced, carbon emission targets tightened by another 1%
The EU's carbon trading market regulates nearly 11,000 energy-intensive companies in sectors such as energy, steel, mining, and papermaking, representing nearly half of EU emissions. The EU aims to reduce greenhouse gas emissions by 55% by 2030 compared to 1990 levels, making carbon market reform imperative.
The EU carbon market uses capping to reduce carbon emissions. Companies that successfully reduce carbon emissions and keep emissions below their capped quotas generate tradable carbon credits. Companies that fall short of their emissions reductions are required to purchase carbon credits to offset their emissions. The trading price per ton of carbon fluctuates based on the supply and demand for carbon credits and allowances.
Negotiations began on the 16th and took 30 hours to reach an agreement. The representatives decided that greenhouse gas emissions covered by the EU ETS must be reduced by 62% by 2030 compared to 2005, 1% more than the 61% originally proposed by the European Commission.
To achieve this goal, the ETS will cut its allowances by 90 million tons of carbon dioxide equivalent in 2024 and another 27 million tons in 2026. Between 2024 and 2030, the allowances will be cut annually by 4.3% to 4.4%.
Carbon tariffs in, free quotas out 2026
Concerned that EU products might be unable to compete with foreign products due to carbon emission restrictions, the EU previously provided free carbon quotas. However, the EU's carbon tariff (Carbon Border Adjustment Mechanism, or CBAM) will gradually take effect starting in 2026, with full implementation in 2034. Foreign products imported into the EU will be subject to carbon tariffs, and thus, the free carbon quotas will be phased out.
In line with the implementation schedule of carbon tariffs, the free carbon emission quotas for EU companies will be gradually reduced from 2026 and will be reduced to zero in 2034.
ETS 2 will be implemented in 2027, including regulations for high-carbon-emitting transport and construction.
The EU's current carbon market, the ETS, regulates sectors such as energy and manufacturing. The EU plans to launch a new carbon market, ETS 2, in 2027, to also regulate emissions from road transport and the construction sector. This means that high-emission vehicles and buildings will also have to purchase carbon credits. Concerns about the potential impact on the general public and the potential for exacerbated energy poverty have led to considerable controversy during the negotiations.
According to Reuters, carbon prices in the European carbon market have been rising steadily in recent years, reaching around €84 per ton on the 16th of this month, roughly ten times the price five years ago. According to Politco, the final agreement stipulates that if natural gas prices in 2027 are too high, the implementation of ETS 2 will be postponed to 2028. Furthermore, ETS 2 will implement a carbon price stabilization mechanism, which will release additional carbon emission allowances when the carbon price exceeds €45 to prevent a price spike.
To help consumers and small businesses cope with carbon costs and invest in energy-efficient building renovations or electric vehicles, the EU plans to launch an 86.7 billion euro Social Climate Fund (SCF), partly funded by revenue from the new EU carbon market and partly by national governments.
The negotiations also discussed an innovation fund and the inclusion of shipping in the carbon market. Furthermore, the ETS is expected to regulate carbon emissions from waste incineration plants from 2028, though implementation may be delayed until 2030.
Peter Liese, a German member of the European Parliament, said the agreement would help the EU combat climate change at low cost and send a clear signal to European industry that investing in green technology would yield good returns.
Information source: Environmental Information Center (https://e-info.org.tw/node/235769）
