After a provisional deal on the Carbon Border Adjustment Mechanism (CBAM) earlier this week, the EU has now announced a deal on one of the most important files within the Fit for 55 package: the reform of the EU Emission Trading System (EU ETS). Negotiators also reached agreement on the creation of an Emission Trading System for road transport and buildings (ETS2) and a Social Climate Fund (SCF).
Alex Mason, Head of Climate and Energy at WWF European Policy Office, said: “This would have been a good deal ten or twenty years ago, but in 2022 it’s too little too late. And it favours big polluters over helping citizens get off expensive fossil fuels, by continuing to hand out billions in free emissions allowances with few strings attached.”
Weak overall ETS target
The European Parliament and European Council did not increase meaningfully the level of ambition proposed by the European Commission, agreeing instead on a 62% emission reduction target for ETS sectors by 2030 compared to 2005 levels. Science tells us that this falls below what is required to hold global temperature increase below dangerous levels. To fix this and to be sure the 2030 target is met, ETS sectors should reduce their emissions by at least 70%.
‘Polluter-pays-principle’ still not applied
With 2030 just around the corner, the next few years are crucial to achieve deep emission cuts in the industrial sector. While it’s welcome that co-legislators agreed on phasing-in the Carbon Border Adjustment Mechanism (CBAM) in 2026 and phasing out almost half of free ETS allowances for CBAM sectors by 2030, the pace of this phase out is far too slow. With a full phase-out due to happen only in 2034 for CBAM sectors, big polluters will continue to receive billions of freebies in the next decade.
Meanwhile, co-legislators agreed on imposing symbolic conditionality requirements for industries to comply with in order for them to get their share of free allowances in full. The free allocation of emissions allowances will be made conditional on investment in techniques to increase energy efficiency. However, if a company does not comply, it will still receive as much as 80% of its previously allocated free allowances. WWF also deplores the fact that climate neutrality plans will be required only for the “worst performers”.
Key to the negotiation was also the topic of how EU countries should spend the revenues from carbon pricing. The old rules suggested that EU countries spend at least half their yearly ETS cash on climate action. But a recent WWF analysis showed that a majority of EU countries failed to do so. Now EU countries committed to spend all their ETS cash on climate action projects in the future.
“Pushing the ETS sector in the CEE region to decarbonise with the right instruments is essential for achieving net-zero. Heavy polluters, especially in Romania and Bulgaria are large receivers of free permits to pollute and continuing to receive these free permits under weak conditionality will not lead to desired results. At the same time, it is definitely positive that now all revenues from auctions will have to be spent on climate actions. As we know, countries in the region have not been spending more than 50% of their revenues in this direction.”, said Ana-Maria Seman, Regional Climate Lead at WWF CEE.
Social Climate Fund: small but at least it’s there
During the same negotiations the Council and Parliament also agreed on a deal on an Emissions Trading System for buildings and road transport (ETS2), as well as the Social Climate Fund, whose size will be linked to the ETS2.
As households in the most vulnerable situations struggle with high energy prices, EU negotiators have however limited the amount of support available to households to help them cut their energy use and install renewables. The SCF budget will be capped at €86.7 billion for the period 2026-2032, an amount that only includes a 25% contribution from EU countries. And unfortunately the size of the Fund is fixed, meaning it will stay the same even if the carbon price goes up after 2030. The remaining revenue will go into EU countries’ national budgets, and governments should in theory spend this on climate action and on addressing the social aspects of the ETS2.
What's more concerning still is the fact the Parliament and Council failed to agree on a clear fossil fuel exclusion: measures only need to reduce fossil fuel use. Fossil fuels, including fossil gas, have proven to be insecure and expensive energy sources, while renewable energy based and energy savings solutions just keep getting better and cheaper. The Fund risks locking those who can afford it least into expensive and polluting energy for longer.
