Reform of the EU emissions trading scheme

At a glance

The main elements of the decision to establish the EU ETS market stability reserve are:

  • the MSR will be established in 2018 and operate from 1 January 2019
  • triggers adjustments to the annual auction volumes if the number of allowances if circulation exceeds its predefined range
  • places the 900 million 'backloaded allowances' on the MSR (instead of being auctioned in 2019-2020)
  • transfers  unallocated allowances directly to the MSR  in 2020 
  • review of the EU ETS and MSR will take into account carbon leakage and competitiveness aspects, including employment and GDP-related issues

The EU's emissions trading scheme (EU ETS) was launched in 2005 to promote the reduction of greenhouse gas emissions in a cost-effective and economically efficient way. It restricts the volume of greenhouse gases that can be emitted by energy-intensive industry, power producers and airlines. Emission allowances are capped at a level set by the EU, and companies either receive or buy individual allowances. The cap is reduced over time so that the amount of emissions gradually decreases.

In recent years, the economic crisis has contributed to a drop in emissions and lowered the demand for emission allowances. Along with other possible factors, this has led to a decrease in the carbon price and the accumulation of a large surplus of allowances in the system, risking to prevent the EU ETS from providing the incentive to reduce emissions  in a cost-efficient manner and from driving low-carbon innovation.

A reduction of greenhouse gas emissions in the EU by at least 40% by 2030 (compared to 1990 levels) is one of the targets agreed by the European Council as part of the 2030 climate and energy framework. Since the EU ETS will be the main instrument for achieving this target, its reform is necessary to ensure a well-functioning system.

As a first step of the reform, the EU recently adopted a decision to create market stability reserve (MSR) for the EU ETS. The aim of the reserve is to correct the large surplus of emission allowances which has built up in the EU ETS and to make the system more resilient in relation to supply-demand imbalances.

On 15 July 2015, the Commission presented a second proposal, which represents a broader review of the EU ETS. The aim of the proposal is to take the European Council's guidance on the role the EU ETS should play in achieving the EU's 2030 greenhouse gas emission reduction target, and make it law. The proposed changes also aim to foster innovation and the use of low-carbon technologies, helping to create new opportunities for jobs and growth, while maintaining the necessary safeguards to protect industrial competitiveness in Europe.

In detail

Proposal to revise the directive on the EU emissions trading scheme (EU ETS), to enhance cost-effective emission reductions and low carbon investments - 2015/148(COD)

To achieve the target of reducing EU emissions by at least 40% by 2030,  the sectors covered by the EU ETS will need to reduce their emissions by 43% compared to 2005. This means that the overall number of emission allowances will decline at a faster pace than before: from 2021 onwards by 2.2% annually instead of 1.74%.  This is equivalent to an additional emissions reduction of around 556 million tonnes between 2020 and 2030 - approximately the same as the UK's annual emissions.

The Commission's proposal includes the following changes, among others:

  • revision of the system of free allocation, focusing on    the sectors at highest risk of relocating their production outside the EU (this covers around 50 sectors)
  • a considerable number of free allowances set aside for new and growing installations
  • more flexible rules to better align the amount of free allowances with production figures
  • an update of all benchmarks used for measuring emissions performance - to reflect technological advances since 2008

Around 6.3 billion allowances, worth as much as €160 billion, are expected to be allocated for free to companies between 2021 and 2030.

The Commission also proposes to create several support mechanisms will be established to help the industry and the power sectors meet the innovation and investment challenges of the transition to a low-carbon economy. These include two new funds:

  • innovation fund - extending existing support for the demonstration of innovative technologies to breakthrough innovation in industry
  • modernisation fund - facilitating investments in modernising the power sector and wider energy systems and boosting energy efficiency in 10 lower income member states

In the Council/European Council

Proposal to revise the EU-ETS for 2021-2030

The proposal to revise the EU-ETS will be negotiated and adopted through the ordinary legislative procedure. The Council therefore co-legislates with the European Parliament.

The Environment Council on 28 February 2017 agreed its negotiating position (general approach). This means that the negotiations with the European Parliament can start with the aim of reaching an agreement on the final text. The European Parliament agreed its position on 15 February 2017.