EU to Increase Price of CO2

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    Stockholm (NordSIP) – In the latest instance of accomplishments under its ‘Fit for 55’ legislative package, the Council and the European Parliament reached a provisional political agreement on the EU emissions trading system (ETS), which will lead to an updated increase in the price of CO2. Comparing the details of this deal suggest that the European Parliament was able to extract slightly more generous terms from the Council than the EU governments had originally hoped for.

    “The agreement on the EU Emissions Trading System and the Social Climate Fund is a victory for the climate and for European climate policy. This will allow us to meet climate objectives within the main sectors of the economy, while making sure the most vulnerable citizens and micro-enterprises are effectively supported in the climate transition. We can now safely say that the EU has delivered on its promises with ambitious legislation and this puts us at the forefront of fighting climate change globally,” said Marian Jurečka, minister for the environment of Czechia, the country presently holding the rotating presidency of the Council of the EU, the body representing EU national governments.

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    The agreement also includes an agreement regarding the Social Climate Fund and follows on the heels of last week‘s announcement that the two EU legislative bodies had reached a similar agreement regarding the creation of an EU Carbon border tax. The deal is provisional pending formal adoption in both institutions and follows the adoption of a Negotiating Position on this issue by the Council in June.

    ETS Reform and Higher CO2 Prices

    The EU ETS is a carbon market based on a system of cap-and-trade of emission allowances for energy-intensive industries and the power generation sector. It is the EU’s main tool in addressing emissions reductions, covering about 40% of the EU’s total CO2 emissions. Since its introduction in 2005, the EU’s emissions have decreased by 41%. The agreement reached today makes the system more ambitious in order to cut down even further emissions.

    The Council and Parliament agreed to increase the overall ambition of emissions reductions by 2030 in the sectors covered by the EU ETS to 62%, up from the original 61% in the Council’s negotiating position. According to Pascal Canfin, a French MEP who chairs the European Parliament’s environment committee, the price of CO2 will increase from €80-85, currently, to €100, after the reform. This is an important achievement in the context of the pervasive perception within the bloc that CO2 is generally underpriced.

    The market stability reserve (MSR), a rule-based mechanism used to stabilise the EU ETS by holding and distributing carbon allowances to stabilise the market, will be strengthened by prolonging beyond 2023 the increased annual intake rate of allowances (24%) and setting a threshold of 400 million allowances, in line with the Council’s original position. The agreement also reinforces the the EU’s ability to control excessive price fluctuations by providing for an automatic release of allowances from the MSR to the market.

    Lower Ceiling and Ending Free Allowances

    The present deal also lowers the CO2 emissions ceiling and to ending free allowances for strategic sectors. The agreement includes a rebasing of the overall emissions ceiling over two years of 90 and 27 million allowances respectively and increase the annual reduction rate of the cap by 4.3% per year from 2024 to 2027 and 4.4% from 2028 to 2030 (“linear reduction factor’), up from the 4.2% original goal in the Council’s negotiating position.

    As regards sectors covered by the Carbon Border Adjustment Mechanism (CBAM) – cement, aluminium, fertilisers, electric energy production, hydrogen, iron and steel, as well as some precursors and a limited number of downstream products – the Council and Parliament agreed to end free allowances for these sectors, over a nine-year period between 2026 and 2034. 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 Organisation’s rules.

    Furthermore, facilities that will benefit from free allocations will need to comply with conditionality requirements, including in the form of energy audits and for certain installations climate neutrality plans. Additional transitional free allocations can be granted under certain conditions to the district heating sector in certain member states, in order to encourage investments into decarbonising that sector. The co-legislators agreed to delete the derogation for installations for electricity generation and move the remaining allowances into Modernisation Fund to support modernisation, diversification and sustainable transformation of the energy sector.

    The Commission will assess and report by 31 December 2026 on the possibility of including the municipal waste incineration sector in the ETS with a view to including it from 2028 and assessing the need for a possibility of an opt out until 2031.

    The Social Climate Fund

    The Council and Parliament agreed to establish a Social Climate Fund to support vulnerable households, micro-enterprises and transport users, which would be part of the EU budget up to a maximum amount of €65 billion, up from the Coucil’s original €59 billion proposal.

    The fund would be established over the period 2026-2032, with eligibility of expenditures from 1 January 2026 based on auctioning of 50 million allowances in 2026 to allow for support at the start of the fund (‘frontloading’) while the new emission trading system would provide for financing of the Fund as of 2027. The fund will be used by member states to finance measures and investments to address the impact of carbon pricing on vulnerable citizens and micro-enterprises.

    Each member state would submit to the Commission a ‘social climate plan’, containing the measures and investments they intend to undertake to cushion the impacts of the new emission trading system on vulnerable households. Such measures could include increasing the energy efficiency of buildings, the renovation of buildings, the decarbonisation of heating and cooling in buildings and the uptake of zero-emission and low-emission mobility and transport, and measures providing direct income support in a temporary and limited manner.

    The Council and Parliament decided to apply a ceiling of 37.5% of the estimated total costs of social climate plans to the possibility for member states to offer temporary direct income support.

    Image courtesy of Picture from Pixabay
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