Brussels heads for a climate showdown with the EU split into three

Brussels. Yesterday, the European Commission launched a major review of the EU Emissions Trading Scheme (ETS), a cornerstone of the EU’s climate and decarbonisation policy, which Italy and the countries of Central and Eastern Europe regard as an unsustainable cost for their industries. The aim of the reform is to reconcile climate action, innovation and competitiveness: “To keep the clean transition on the right track, provide relief for our industry and support decarbonisation,” said President Ursula von der Leyen. The Commission has come under intense pressure from three groups of Member States. Spain and the Nordic countries want to preserve the ETS in its entirety following the investments made in renewables and fear that the review will undermine the price signal. Italy and Poland are leading a group of ten Member States that would like to significantly scale back the most successful tool for decarbonisation, accusing it of imposing a huge cost on their industries. Germany and France are in the middle, in favour of some adjustments. The Commission has sought to strike a balance, taking into account the fact that the EU faces much fiercer global competition over green technologies than it did ten years ago, particularly from China. The ETS will be adapted “to an ever-changing economic and geopolitical context” with “greater flexibility for industry in the coming decades”, a Commission source explained to *Il Foglio*.

The Commission’s proposal results in a slower emissions reduction trajectory for sectors covered by the ETS from 2031 onwards, more free allowances for energy-intensive industries, and a market stability reserve that will also serve to prevent price spikes. The Commission also plans to provide more support for Eastern European countries, Greece and Portugal (Italy is not included), as well as to establish a Bank for Industrial Decarbonisation, which is expected to provide €100 billion in investment by 2040 (€30 billion of which will be guaranteed by an ‘investment booster’). The ETS is set to be extended to flights from outside the EU landing within 5,000 kilometres of Frankfurt (the US and China are excluded), to a number of ships that were previously excluded, and to waste incineration. However, industries and Member States will be subject to a series of conditions regarding the easing of climate action. The additional free allowances will only be granted to companies that submit investment plans for decarbonisation. Member states will be required to spend at least 50 per cent of ETS revenues on decarbonisation investments in the energy sector, industry (including chemicals and fertilisers), green technology, aviation and the maritime sector.

The reduction in the linear cap rate for emission allowances is the most significant measure in the Commission’s proposed revision, as it affects the price more than any other element of the ETS. Continuing with the current reduction rate (4.3 per cent, rising to 4.4 per cent from 2028) would mean bringing emissions from sectors covered by the ETS to zero by 2039 – an ill-advised move that would bring forward the climate neutrality target set for 2050. The Commission proposes to reduce the rate of reduction in the allowance cap to 3.7 per cent from 2031 to 2035 and to 1.7 per cent from 2036 onwards. Furthermore, the proposal provides for the introduction of up to 2 per cent international credits for the period 2036–40 and the inclusion of CO₂ removal amounting to 250 megatonnes. The Commission plans to keep more ETS allowances on the market: the rate at which allowances are drawn from the market stability reserve will fall from the current 24 per cent to 12 per cent, a change that will allow more allowances to remain on the market for longer. The market stability reserve will be more dynamic in releasing allowances in the event of price spikes. Between the measures already announced and the revision proposed yesterday, the additional free allowances for industry are worth around ten billion euros. The sectors covered by the Carbon Border Adjustment Mechanism (CBAM) – iron and steel, aluminium, cement, fertilisers, hydrogen and electricity – will continue to benefit from free allowances until 2038. The package presented yesterday by the Commission also contains a series of measures to double the EU’s electrification by 2040, including a requirement to tax gas more heavily than electricity and an end to fossil fuel subsidies.