Countries push for flexibility in the European carbon market

As POLITICO points out, the ETS has become the EU's most important tool for achieving its climate goals and has had important results. Since 2005, when the system began operating, the European carbon market has reduced the bloc's emissions by around 1 billion tons of carbon dioxide equivalent. A volume corresponding to annual global civil aviation emissions.

However, its current configuration is designed to regulate emissions until 2030. Thus, the ETS review aims to reposition the European carbon market towards the bloc's long-term goal of net-zero carbon emissions by 2050. And this is exactly where the disagreements begin.

Today, the European ETS only regulates economic sectors with the largest carbon footprint, such as steel, energy and air and maritime transport within the bloc's borders – which together represent up to 40% of EU emissions. To make the bloc's net-zero objective viable, the carbon market needs to expand its scope, including other sectors, and increase the price of emission permits (currently, 80 euros per ton of carbon). Furthermore, the market review needs to analyze sectors that currently receive a portion of emission permits for free, such as the manufacturing sector and some power plants.

However, the panorama of the political debate among EU countries does not indicate that the review will move in this more ambitious direction. To begin with, some European governments indicate that the current price of permits is an excessive burden on their economies and are pushing for a new, lower level. Another demand from these governments is the issuance of new permits (which, under current rules, are prohibited until 2039), in addition to the increase in free permits. All of this would facilitate the increase in emissions from sectors regulated by the ETS – exactly the opposite of what should be being pursued by Europeans.

Political pressure is strong. Reuters highlights that ten countries, led by Italy and Poland, reinforced the demand for a more flexible emissions trading system, under the argument that stricter rules would represent an additional tax on European consumers, already pressured by inflation. If maintained, this opposition would make it impossible to approve any changes to the ETS.

Therefore, even before presenting the new proposal, the European Commission has already signaled that it must make the changes planned for the bloc's carbon market more flexible. According to the Financial Times, the EU's executive arm should propose a longer implementation schedule, with the possibility of issuing more free permits. Today, the annual reduction in the volume of permits in circulation in the ETS (cap) is 4.4%, but the new proposal should foresee a smaller reduction, in the range of 3.5% to 3.9% between 2031 and 3025, and to around 2.2% after 2036.

At the same time, other countries in the bloc reinforced that they do not intend to approve changes that weaken the system. Spain, Sweden and Finland warned that any relaxation of the ETS will make it difficult to decarbonize the European economy and achieve its net-zero objective by 2050.

The battle also takes place in the European Parliament. The European People's Party (EPP), the largest political bloc within the House, reinforced pressure for the EU to extend free permits beyond 2030, with the aim of “safeguarding the EU's industrial competitiveness”. As Reuters recalls, the EPP includes the political group of the current president of the European Commission, Ursula von der Leyen.

The Financial Times also highlights another potential “banana peel” in this discussion: the European Commission wants governments to increase the percentage of money raised by each country on emission allowances for climate action. Today, less than 5% of the almost €24 billion that governments obtain annually from the ETS is actually allocated to decarbonization.

Business Green, DW and Economist also addressed expectations surrounding the new proposal for the European ETS.