Last Friday, the European Commission presented its proposal to revise the ETS, the EU system for trading carbon dioxide emission allowances, loosening some previously defined rules. The ETS is one of the pillars of the European Union’s climate policy, but it is often criticized – especially by so-called energy-intensive industries, which for technical reasons have difficulty replacing fossil fuels in their production cycles – for its negative impact on competitiveness, as it entails additional costs for businesses.
WHAT THE ETS IS AND WHAT IT IS FOR, IN A FEW WORDS
The ETS is the European system that puts a price on CO2 emissions through a market for buying and selling allowances. Each year, companies receive allowances – “emission permits,” so to speak – authorizing them to emit a certain amount of CO2. However, since the total number of allowances progressively decreases over time, the most polluting companies will have to buy additional permits if they want to continue emitting CO2 without incurring penalties; conversely, “cleaner” companies have the opportunity to sell their unused allowances.
The purpose of the ETS is to make the use of fossil fuels unattractive and promote the spread of low-carbon sources and technologies. To date, the economic impact of the mechanism is mainly felt by energy-intensive companies (which consume large amounts of energy in their processes) and hard-to-abate sectors (difficult to decarbonize because their cycles are not easily electrifiable: steel, cement, and chemical industries, for example), which cannot replace fossil fuels and therefore must purchase many CO2 allowances.
HAS IT BEEN SUCCESSFUL?
As Reuters reminds us, more than 55 percent of emission permits are sold on the market each year, while the remaining portion is distributed free of charge to companies. Over time, however, the price of CO2 has increased significantly: today it is around 80 euros per ton, while about ten years ago it was below 10 euros.
Since 2005, CO2 emissions from sectors covered by the ETS have halved. Most of the reduction, however, has come from the power sector, where the CO2 price has reduced the competitiveness of coal and gas plants, favoring renewable installations. On the other hand, there has not been a significant reduction in emissions from heavy industries.
WHAT THE EUROPEAN COMMISSION PROPOSES ON THE ETS…
The European Commission, still led by Ursula von der Leyen, has long begun a process of “lightening” the green regulatory framework introduced in recent years. Regarding the ETS, Brussels proposed last Friday to slow down the reduction of emission permits available to companies: CO2 quotas will decrease overall by 3.7 percent per year starting from 2031 – instead of the current 4.3 percent rate – and then by 1.7 percent from 2036.
A slower phase-out pace will leave more allowances on the market than originally planned, helping contain the CO2 price and giving companies more time to adapt to decarbonization. On the other hand, companies that have already invested billions in restructuring their production processes would be penalized.
… AND WHAT IT ASKS IN RETURN
In short, the Commission proposes to allow more CO2 allowances to circulate for longer, accommodating the requests of energy-intensive sectors and some countries – including Italy and Poland – particularly penalized by the current mechanism. In return, it wants more transparency from member states on the use of funds raised through ETS auctions, to ensure that this money is actually spent on promoting the adoption of clean technologies rather than other purposes (such as financing infrastructure construction, for example, or supporting the public budget).
At least half of the revenues collected by national governments from ETS auctions must be spent on industrial decarbonization; currently – according to Commission estimates – less than 5 percent of the funds are allocated for this purpose.
Furthermore, the European Union will provide 80 percent of free allowances in advance to companies that implement investment plans in decarbonization in Europe, to help them compete internationally; the remaining 20 percent will be allocated upon the realization of the investments.
AND NOW?
The European Commission’s proposals must now be approved by the Parliament and member states. Some of these – including Italy, as mentioned – are in favor of softening the mechanism, while others – Finland, Sweden, and Spain, for example – oppose a deep modification, considering it penalizing for those who have already invested in decarbonization and manufacturing innovation: essentially, they want the system to remain as it is to preserve regulatory certainty, considered an essential condition to encourage investments.
NEW RULES FOR AVIATION, A NEW TARGET FOR ELECTRIFICATION
Among other things, from 2029 the ETS will also apply to the aviation sector – which depends on fossil-based fuels: essentially kerosene –, but only for flights to destinations within a radius of five thousand kilometers: Turkey and the Middle East will thus be covered by the system, but not the United States.
The Commission has also announced a new electrification target, at 46 percent by 2040: the current level is 23 percent of total final energy consumption. According to Brussels, achieving this target would allow the Union to reduce fossil fuel import expenses by 260 billion euros. However, electricity is not an energy source – like natural gas and coal, or like solar and nuclear – but a vector, that is, a “container” of the energy used to produce it.
