European Emission Trading Scheme

Started in 2005, the EU emissions trading system (EU ETS) covering about 11 000 installations is an essential part of the EU’s policy to combat climate change. The EU ETS works on the 'cap and trade' principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by the installations covered by the scheme. The cap is reduced over time. Since the introduction we had several trading phases. Now into its fourth trading phase (2021-2030), the ETS framework has undergone several revisions to maintain the system’s alignment with the overarching EU climate policy objectives.

EU Fit for 55 Package: Advancing Climate Policy
Towards a Sustainable Future

The European Union’s “Fit for 55” package represents a strategic alignment of the EU’s energy and climate policy instruments with its ambitious target to reduce greenhouse gas emissions by 55% by 2030, relative to 1990 levels. A cornerstone of this package is the enhancement of the European Emissions Trading System (EU ETS), the EU’s principal mechanism for incentivizing emissions reduction across industries.

Following a formal agreement between EU Member States, the European Commission, and the European Parliament in December 2022, amendments to the Emissions Trading Directive were published in the Official Journal of the European Union on 16 May 2023. These revisions introduce critical updates to EU ETS 1, covering emissions from stationary installations and aviation. From 2024, the system will be extended to include maritime transport, underscoring the EU’s commitment to achieving significant emissions reductions across a broader range of sectors. In tandem, updates to the Market Stability Reserve (MSR 1) are also outlined, supporting the stability and resilience of the emissions trading framework.

A detailed factsheet has been prepared regarding the introduction of a new emissions trading system (EU ETS 2) specifically for buildings and road transport. Additional factsheets are available on key components such as maritime transport, aviation, and the Carbon Border Adjustment Mechanism, offering a comprehensive overview of the policy adjustments.

Key Provisions of the Revised EU ETS

The EU ETS 1 ambitions have been significantly enhanced, setting a new emissions reduction target of 62% by 2030 (from 2005 levels), inclusive of aviation and maritime transport. This goal will be pursued through an increase in the linear reduction factor (LRF) from 2.2% to 4.3% starting in 2024, with a further increase to 4.4% from 2028. Additionally, the total emissions cap will undergo a reduction in 2024 and 2026, decreasing by 90 million and 27 million allowances, respectively.

In a major expansion of scope, the EU ETS 1 will now include maritime transport. Following transition periods in 2024 and 2025, shipping companies will be required to surrender 100% of their allowances for verified emissions by 2026. For the year 2024, the aggregate cap for stationary installations and maritime transport is set at 1,386 million allowances.

Update on Product Benchmarks for Stationary Installations

Starting in 2026, the product benchmarks for stationary installations will be lowered more significantly compared to the 2021-2025 period. The reduction rate, which depends on the emission reduction rate in the relevant industrial sector, will increase from a maximum of 1.6% per year to 2.5%. Consequently, the benchmarks for the 2026-2030 phase could be up to 50% lower than those for the 2013-2020 phase. Additionally, the free allocation of allowances will be partially linked to the implementation of energy audits or energy management system measures.

Sector-Specific Adjustments to Free Allocation

The existing system of free allocation remains in principle for industrial sectors; however, industries covered by the new Carbon Border Adjustment Mechanism (CBAM) will see a phased reduction in free allowances from 2026, with a complete phase-out by 2034. Maritime transport will be fully subject to auctioning without free allocation, while the free allocation of allowances for aviation is set to expire in 2026.

Updates to the Market Stability Reserve (MSR)

Since 2019, the EU Emissions Trading System (EU ETS 1) has included supply management through the Market Stability Reserve (MSR 1). The MSR 1 aims to reduce surplus allowances and enable flexible, rule-based responses to supply and demand shocks. From 2024, the Total Number of Allowances in Circulation (TNAC) will include aviation and maritime transport allowances, slightly reducing the TNAC and the number of allowances transferred to the MSR 1.

The MSR 1 will continue to transfer 24% of the TNAC to the reserve if the upper threshold is exceeded, reverting to 12% from 2031. If the TNAC falls below the lower threshold, allowances will be distributed. For TNAC values between 833 and 1,096 million, a new rule will automatically reduce the quantity to 833 million, ensuring stability in the market.

Expansion of Innovation and Modernisation Funds

The innovation and modernization funds will see an increase and extension to cover additional projects and regions. Allocation guidelines will also be updated, linking modernization fund support for fossil fuel projects (natural gas) more stringently to compliance requirements.

These amendments signify a considerable advancement in the EU’s climate policy framework, promoting robust emissions reductions across critical sectors while reinforcing Europe’s leadership in the global transition to a sustainable and resilient low-carbon economy.