ELS #Energy - What will be the outcome of the ETS reform?

Last month the EU Committee on the Environment, Public Health and Food Safety (ENVI) backed an approach leading to emissions being cut by 67% until 2030 in sectors covered by the ETS, a more ambitious approach than the Commission´s proposal of 61% presented in the Fit-for-55 package last year. However, members of the European Parliament later passed a series of amendments, pushed by conservative MEPs, which in practice would contribute to lower emission cuts than proposed by the ENVI. These amendments would have created a later phase out of free carbon allowances (2035 instead of ENVIs proposal of 2030).

On Wednesday, it was time for the Parliament to vote on the ETS reform proposal with its amendments. The result was a rejection of the ETS reform. Essentially, the position the Parliament appeared ready to adopt in the vote would have achieved 63 % cuts. But that position also included a slower one-off reduction of carbon allowances, removing 70 million from the market in 2024 and 50 million in 2026 instead of the Commission’s proposal of 117 million in 2024, allowing for a higher supply and therefore potentially lower EUA prices. In the end, the Green and Socialist parties rejected the proposal because, they said, the conservative groups’ amendments weakened the reform too much. Right-wing groups also rejected it because they considered it too ambitious in the light of inflation. The voting result essentially also led to the carbon border adjustment mechanism (CBAM) and the social climate fund being rejected as well. The reform will now be passed back for review again.

With many key issues pulling in different directions depending on different views in the Parliament, the question is; which final overall approach will have a chance of winning a majority in the European Parliament? Does the result from Wednesday’s vote indicate that the trade-off will lie in a higher reduction target or in limiting the supply of allowances further? And essentially what will this mean for the phase out of free allowances and when CBAM will start to apply?

This week’s vote was a setback given that the ETS is the one of EU´s strongest tools for achieving climate goals and whose reform may now be delayed. Basically, the drawback stems from two different conclusions: on the one side, members are cautious about putting too much pressure on companies, especially in today’s economic landscape, and on the other side, members want to speed up the green transition.

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