World’s top emissions market is about to get bigger as EU unveils new climate plan

The world’s largest emissions market is about to get bigger and stricter.

In landmark climate proposals set to transform everything from heating to transport, the EU is seeking to expand its flagship carbon market. The bloc also wants accelerate the rate at which companies from utilities to steelmakers and cement producers are forced to curb pollution.

The changes would help the EU cut emissions by at least 55% from 1990 levels by 2030 and reach net zero by 2050. They’d also set a precedent for other nations seeking to clean up their economies to avert catastrophic rises in global temperatures ahead of climate talks in Scotland later this year.

The overhaul, the biggest since the Emissions Trading System was created in 2005, would raise to 4.2% the rate at which the pollution cap shrinks each year from 2.2% now, according to the proposals unveiled on Wednesday. The EU would also expand its carbon market to include shipping and start an adjacent emissions-trading programme for heating and transport fuels. Expectations of stricter rules has already help send carbon prices to a record this year.

“This reform could be the most crucial change to the EU ETS so far,” said Marco Mensink, director-general of the European Chemical Industry Council. “We have to get it right. It has to not only set the framework for emissions reductions but also help create breakthrough technologies we urgently need.”

Benchmark carbon futures traded in Amsterdam surged as much as 4.9% to €55.46 a tonne, before falling 0.5% by 3.50pm Central European Time.

The measures are part of a broader package to bring every sector of the EU’s economy in line with the stricter emissions goal agreed under the ambitious Green Deal. The EU ETS, a cap-and-trade programme that’s a central pillar of the bloc’s strategy to cut greenhouse gases, has already brought emissions down in the past 16 years to a level just shy of its existing 2030 goal of 43%.

The emissions-trading programme imposes annually declining caps on about 12,000 installations owned by manufacturers and utilities, and limits pollution from airlines. Companies that discharge less carbon can sell their unused permits, getting an incentive to go green faster.

Legislative process

The proposed reform still needs approval from the European Parliament and from member states in the EU Council to be turned into law, with each institution entitled to propose amendments to the plan. The legislative process usually takes about two years.

It will still be a while before the higher rate at which pollution caps decline, or the so-called the Linear Reduction Factor (LRF), starts to apply. The commission wants it to take effect only a year after the overall reform enters into force.

The bloc is also proposing to complement the higher LRF with a one-time cut to the emissions cap reduction of 117-million allowances. The two together will translate into a 61% drop in the pollution limit by the end of this decade from 2005 levels, according to the commission.

“I believe that using the markets to make this transition happen is the most important instrument because it has worked so well in the EU ETS so far,” said Frans Timmermans, the executive vice-president of the European Commission, who’s in charge of the Green Deal. “Enlarging this system to shipping, reducing free allowances, being more strict on air transport is a good way forward.”

Supply control

The strengthening of a supply-control mechanism and tougher rules for handing out free permits to energy-intensive industries are also part of the proposals.

The EU executive arm wants to include maritime transport into the existing ETS, with a phase-in period between 2023 and 2025 and full compliance with pollution caps as of 2026. A parallel emissions-trading programme would be created for heating and road transport fuels, with compliance planned from 2026, according to the proposals.

To allay concerns about the costs of the reforms in a global market already grappling with energy inflation, the commission wants to create a fund that national governments could use to compensate vulnerable citizens. The Climate Social Fund would be financed from a part of revenues generated by the new carbon trading programme.

Governments would have to use the revenues from auctions of carbon permits for climate-related purposes, including support for “low-income households’ sustainable renovation”. The EU would also strengthen a special ETS-based fund for modernisation in low-income member states.

“We have to show that we can decarbonise and at the same time make it affordable,” Timmermans said. “And of course this transition won’t be easy but it can be done.”

Bloomberg News. More stories like this are available on bloomberg.com