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EU CO2 Emission trading law

Nobody would have thought that we had to defend climate protection in this way. They fought for ambitious climate protection and were able to ward off almost all attempts to mitigate climate protection. (in December 2022) They were creating a strong, stable and high CO2 price in Europe, which makes the European coal phase-out more likely by 2030 and initiates the gas phase-out.

The free pollution party has come to an end, we are sending the industry on the modernization course. By 2030, the free emission allowances will be almost halved and completely deleted by 2034. The worst polluters pay for it and those who decarbonize are supported.

At the same time, it is clear that climate protection must now continue. We were able to fend off many things, but this is not enough for the Paris Climate Agreement. This is not yet a “man-on-the-moon” moment. The work is only now beginning to lead climate transformation to success.

If the pollution rights from the previous coal phase-out are shut down, we can raise the climate targets to at least 60 percent by 2030.

Citizens in the EU must expect higher CO2 prices. The Climate Social Fund created for this is not sufficient to compensate for this burden. The EU’s climate protection has an antisocial side. This must change in the future so that social justice does not fall by the wayside.

Background from the 18th December 2022

  • The reform of EU Emissions Trading (ETS) is at the heart of the European Green Deal. EU emissions trading has so far covered about 40% of all EU emissions, namely the energy industry and industry. In 2021, emissions trading included 3,312 million tons of CO2. (DKNA: EU emitted 2.73 billion metric tons of CO2 in 2021, www.statista.com)
  • How does the emissions trading work? The ETS trades authorization certificates for CO2 emissions (CO2 certificates). An absolute number of certificates is set. These must be auctioned and can then continue to be traded by the market participants. This results in a CO2 price, which is currently 85 euros per ton.

Negotiation successes

  • By 2030, half of the free allocations will be history. Emissions under the emissions trading system are reduced by 62%, which is even more ambitious than the Commission had proposed.
  • All revenue from the ETS (both the existing and the new one for transport and buildings) must flow into climate measures.
  • Conditions are linked to free allocations:
    • Audits: Companies must carry out energy audits of their production processes and carry out decarbonization measures according to the results. If they do not do this, their free allocations will be reduced by 20%.
    • Malus: The production facilities, which are among the 20% with the worst climate balance, must also draw up decarbonization plans. If they do not implement both the recommendations in the energy audits and the decarbonization plans, they will be reduced 20% of the free allocations.

The deal in detail

Climate protection

  • Emissions are to be reduced by 62% by 2030. This is 23 million tons less CO2 in the atmosphere than the Commission originally proposed.
  • In 2024, 90 million certificates will be withdrawn from the market (rebasing). In 2026, another 27 million certificates will be withdrawn from the market.
  • In addition, the entire emission cap is reduced by 4.3% every year between 2024 and 2027, then even by 4.4% (linear reduction factor) from 2028.
  • The certificate vacuum cleaner (MSR) will continue to remove 24% of the excess certificates from the market that lie between defined limit values.
  • In addition, the Commission undertakes to check these limit values for their suitability for use and, if necessary, to amend them so that it decrease proportionally to the LRF and the market vacuum cleaner can thus withdraw more certificates from the market in order to get historical surpluses from the market and prevent new ones.
  • Emissions in waste incineration will be monitored from 2024 and from 2028 they will be included in emissions trading. However, Member States have the possibility to postpone the application until 2030 after declaration.

Free allocations

  • By 2030, almost half of the free allocations will be cancelled. By the end of 2034, there will be no longer any free allocations for the highly emitting sectors that fall under the new CO2 tariff. By then, the CO2 tariff should be fully imported. A clear signal for industry to invest in decarbonized processes now.
  • The curve after the free allocations are reduced while the CO2 inch (CBAM) is introduced is as follows:

Conditions for free allocations

  • Audits: Companies must carry out energy audits of their production processes and carry out decarbonization measures according to the results. If they do not do this, their free allocations will be reduced by 20%.
  • Malus: The production facilities, which are among the 20% with the worst climate balance, must also draw up decarbonization plans. If they do not implement both the recommendations in the energy audits and the decarbonization plans, they will be reduced 20% of the free allocations.
  • The Commission assumes that due to these conditions, 75 million more allowances will be auctioned, i.e. the industry will have to pay for issue. Half of the corresponding revenues should then flow into the Innovation Fund and thus promote the decarbonization of industry. Half of them should benefit the Member States, which are primarily intended to support export sectors that are now subject to CO2 tariffs.
  • Benchmarks: Free allocations will continue to be given at the level of the so-called benchmarks at production sites. The benchmarks are the targets for energy-efficient (and thus low-emission) production.
    • By 2026, the benchmarks will be rebuilt and will from now on be defined according to products and no longer by processes. This means that different production methods, but which have the same starting product, are now measured according to the same scale.
    • In addition, the benchmarks will also consider the potential for the circular economy of products in the future.
    • In addition, the benchmarks are now increased by at least 0.3% annually.
  • Member States are urged to delete the allowances that become superfluous due to national coal phase-out from the emissions trading system. If they don’t do this, they have to explain why they don’t.
  • Exports: In addition to the support of additional funds from the “malus” system, the Commission should analyze whether export sectors are protected enough even under the CO2 duty, if they are not, the Commission must propose new measures to provide protection.
  • Free allocation for coal (article 10c) will no longer exist.

Revenue from the ETS

  • 575 million certificates are to be added to the Innovation Fund. With an average price of 80 euros, this is 46 billion euros by 2030. Parliament wanted to auction over 1 billion certificates in favor of the Innovation Fund and thus double the money that for the pioneers of the industrial turnaround.
  • From now on, Member States are obliged to invest 100% of their revenues in climate measures.
  • The Modernization Fund was set up to modernize the economy in less prosperous Member States. The revenues that go into the modernization fund may at least partially continue to be spent on gas, but the “do no significant harm” test must pass. Parliament had wanted to prevent any fossil investments with this fund.

ETS for Heat and Transport and Climate Social Fund

  • For the building and transport sector, a new emissions trading (ETS2) will be introduced in parallel with existing ones from 2027. In addition to households, small companies are now also covered by emissions trading.
  • The price is capped at 45 euros by 2030.
  • In order to support needy households, to make investments to reduce emissions, the Climate Social Fund is introduced. This will provide funds to Brügers one year before the new emissions trading comes into force. Over the period 2026-2032, 86.7 billion euros will be allocated to social climate measures, ranging from building renovation of social buildings to direct income support.
  • If the energy prices (oil and gas) are above 106 €/MWh, the new ETS2 will not be introduced in 2027, but only a year later. (emergency break)
  • Energy suppliers must disclose to the Commission how much of the costs of emission certificates they pass on to end consumers. If the Commission detects misconduct, e.g. unfair surcharges, by the energy supplier, it may take measures to put a stop to this. (cost pass through)
  • 50% of the revenue from the ETS2 will go to the Member States, but they must also use the money for social climate measures, especially in buildings and in the transport sector.
  • What does the ETS2 mean for consumers? A CO2 price of 50 €/tCO2 would increase the price of gasoline by about 10 euro cents per liter and the price of diesel by about 12 euro cents per liter (if it is fully passed on to the end users). Source: Ariadne Report: “A fair and solidarity-based EU emissions trading for buildings and road transport” (06/2022)
    • Impact of a CO2 price of 50 €/tCO2 on EU27 income deciles: Households in the poorest decile would lose about 0.5% of their income, while the loss for households in the richest decile would be about 0.35%. Source: Ariadne Report: “A fair and solidarity-based EU emissions trading for buildings and road transport” (06/2022).

 

Source of above content: Blog by Mr. Michael Bloss, climate policy spokesman for the Greens and negotiator for the Greens in the EU Parliament on the agreement between the EU Parliament and member states on EU emissions trading. www.michaelbloss.eu; accessed 19-12-22

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