European Commission weakens carbon market rules and benefits large polluters

According to POLITICO, the linear reduction factor (LRF) – the rate at which emission limits decrease annually within the system – will be reduced from 4.4% per year to 3.7% between 2031 and 2035. After 2036, the reduction will be even slower, at 1.7% per year. In addition, the European Commission will distribute new free emission allowances for a few more years, including to sectors covered by the Carbon Border Adjustment Mechanism (CBAM).

European industry will also be able to purchase carbon credits outside the EU to offset their emissions from 2036. International credits will be able to cover up to 2% of the emissions reductions required by sectors within the ETS. Consequently, the expectation is that the value of permission within the market, which has remained stable at €80 (R$469), will become cheaper, relieving pressure on regulated sectors.

This flexibility meets the demands of the industry, which claims that the ETS in its current format would require “unrealistic” emissions cuts, at a cost that would end up making prices more expensive for European consumers. Important countries in the bloc, such as Germany, Italy and Poland, have also pushed for less stringent rules for the carbon market from 2030 onwards.

To compensate for the facilitation, the European Commission reinforced the requirement for EU governments to allocate at least 50% of their tax revenue from the ETS to investments in decarbonization. The body also conditioned the release of new free permits and special financing to companies that present a decarbonization investment plan.

The flexibility received criticism even from business circles. “Industries that are slower to transition gain more time to recover, while pioneers are faced with a lower-than-expected carbon price signal,” commented Joop Hazenberg, from the Corporate Leaders Group (CLG) coalition, to the Financial Times. “This mixed approach will result in more emissions and a slower transition of the European industrial base.”

Even with the changes, according to the European Commission, the EU will still be able to fulfill its commitment to reduce net greenhouse gas emissions by 90% by 2040 and to bring them to zero (net-zero) by 2050.

"The proposal presented brings together three main objectives: climate action, competitiveness and independence. It promotes climate action, transforming the ETS into an heir engine of innovation and investment", defended Wopke Hoekstra, European climate commissioner.

Now the political discussion begins in the European Parliament and among the 27 EU member states. Defenders of flexibility showed sympathy for the proposal, but the BBC reports that they have already signaled that they intend to weaken the system even further. Critics have highlighted that they want to avoid dismantling the ETS, which would ruin any chance the bloc has of meeting its climate objectives.

“In the midst of a Europe ravaged by extreme heat, the Commission chose to back down and weaken the EU's most powerful tool for reducing its emissions,” protested Romina Pourmokhtari, Sweden's climate and environment minister, cited by Bloomberg. “Our government will fight tooth and nail against the weakening of the system.”

Euronews, Guardian, Reuters and Wall Street Journal, among others, have also highlighted the European Commission's proposed changes to the EU carbon market.