The European Commission proposes to end the free distribution of ETS by 2038.
The European Commission has published its long-awaited review of the Emissions Trading System (ETS), which proposes slowing the reduction of free emission quotas and extending their phase-out beyond 2034 to 2038. Moreover, member states will have to spend 50% of their national ETS revenues on investments in decarbonizing the ETS sectors, Kallanish notes.
The free allocation of resources will be extended after 2030, but from 2031 it will depend on whether operators develop plans for EU decarbonization and invest an amount equivalent to 100% of the cost of their free allocation in EU decarbonization.
In the meantime, starting in 2031, the trajectory of reducing the total number of ETS emissions permits in the EU, also known as the upper limit, will be adjusted, meaning that permits will continue to be issued until the 2040s. The linear reduction factor (LRF) has been updated to 3.7% for 2031-2035 and 1.7% for 2036-2040.
The current LRF rate of 4.3% (4.4% in 2028-2030) was agreed as part of the ETS reform for 2023 to achieve the EU climate target for 2030. "Simply maintaining this indicator after 2030 will not provide a realistic trajectory for the period up to 2040. This would lead to a reduction of the ETS limit to zero by about 2040, which exceeds the requirements of European climate legislation," the European Commission said in a statement.
"This proposal supports the environmental integrity of the EU ETS, while providing a more predictable and manageable investment framework for the industry in the long term," it says.
The Industrial Decarbonization Bank (IDB) will allocate 100 billion euros to finance the decarbonization project. At the first stage, about 30 billion euros will be allocated under the investment incentive program for 2028-2030, which will be funded by ETS benefits in the amount of 400 million euros. This will accelerate investments until 2030. Projects will be supported on a first-come, first-served basis, while providing special access for low-income Member States.
Moreover, the use of international loans with a high degree of reliability will be allowed from 2036, as stipulated by European climate legislation. A mechanism will be created to purchase these loans to create additional space for reducing emissions in the EU ETS by up to 2%.
The market stability reserve will be more dynamic, and its parameters will be adjusted to reflect the market contraction after 2030. The rate at which it absorbs permits will decrease from the current 24% to 12%, which means that more permits can remain on the market.