European negotiators agreed to reform of the EU's Emissions Trading System on Dec. 18, increasing carbon cutting ambitions to 2030, detailing the removal of free allowances and confirming the inclusion of maritime shipping and a new ETS II for buildings and transport.
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The headline agreement requires the ETS' 10,000 covered installations to reduce their carbon emissions by 62% on 2005 levels by 2030, one percentage point more than proposed by the European Commission and a 44% hike on the current target.
A one-off reduction in EU Allowances of 90 million mt CO2e in 2024 and 27 million mt in 2026 would help Europe deliver on the target, in combination with an annual reduction in EUAs of 4.3% from 2024-2027 and 4.4% from 2028-2030, the EU Council and European Parliament said.
Meanwhile the Market Stability Reserve, providing price stability for installations covered by the ETS, would be "strengthened" by prolonging the raised annual intake rate of allowances (24%) beyond 2023, plus creation of a threshold of 400 million allowances, the institutions said.
Negotiators also agreed free carbon allowances to sectors exposed to carbon leakage would be phased out over a nine-year period between 2026 to 2034, allowing for the gradual introduction of the Carbon Border Adjustment Mechanism.
"During this time the CBAM will apply only to the proportion of emissions that does not benefit from free allowances under the EU ETS, in order to fully respect the World Trade Organization's rules," the Council said.
CBAM-relevant sectors - cement, aluminum, fertilisers, power production, hydrogen, iron and steel, as well as some precursors and a limited number of downstream products – will see their free allowances phased-out at a slower rate at the beginning of the period, with decarbonization support on offer via the EU's Innovation Fund.
"This deal will provide a huge contribution towards fighting climate change at low costs. It will give breathing space for citizens and industry in difficult times and provide a clear signal to European industry that it pays off to invest in green technologies," said MEP Peter Liese, carbon rapporteur for the EP.
By 2025 the EC is to assess the risk of carbon leakage for goods produced in the EU intended for export to non-EU countries, providing a WTO-compliant legislative proposal to address the risk if need be.
In addition, some 47.5 million EUAs would be used to raise new funding to address any risk of export-related carbon leakage, the EP said.
Free allowances: phase out timeline for carbon leakage sectors*
*cement, aluminium, fertilisers, power production, hydrogen, iron and steel, some precursors, some downstream products
Source: European Parliament
Buildings and transport
Meanwhile a separate "EU ETS II" for fuel for road transport and buildings is to be in place by 2027, a year later than proposed by the EC.
As requested by the EP, fuel for other sectors such as manufacturing will also be covered.
ETS II could be postponed until 2028 if energy prices remain exceptionally high, while a new price stability mechanism is to be set-up to ensure that ETS II prices rise above Eur45/mtCO2, 20 million additional allowances will be released.
"Part of the revenues from the auctioning [of ETS II allowances] will be used to support vulnerable households and micro-enterprises through a dedicated Social Climate Fund," the Council said. The fund, fed by various revenues, will have a maximum budget of Eur65 billion.
EU ETS maritime
Negotiators confirmed, meanwhile, the inclusion of maritime shipping emissions within the EU ETS, with obligations on shipping companies to surrender allowances for 40% of verified emissions from 2024, 70% for 2025 and 100% for 2026.
Most large vessels would be included in the EU ETS from the start, while offshore vessels of over 5,000 mt gross tonnage are to be included in the EU's MRV Regulation (monitoring, reporting, verification of CO2 emissions) from 2025, and in the EU ETS from 2027.
General cargo vessels and offshore vessels between 400-5 000 mt gross tonnage would be included in the MRV Regulation from 2025 with inclusion in EU ETS reviewed in 2026.
Emissions of methane and N2O are to be included in the MRV regulation from 2024 and in the EU ETS from 2026.
Separately, EU countries must also measure, report, and verify emissions from municipal waste incineration installations from 2024, with the EC to report by end-January 2026 on potential inclusion of incinerators in the EU ETS from 2028.
Platts assessed the price of EUAs (nearest December) at Eur83.50/mtCO2 Dec. 16, down from Eur90.17/mtCO2 Dec. 12, S&P Global Commodity Insight data showed.