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Transport, heating and cars in the sights of the renewal of the EU carbon market

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BRUSSELS – The European Union wants to reform its carbon market to more rapidly reduce global warming emissions and put a price on pollution from shipping, road transport and heating systems in buildings, a draft document shows seen by Reuters on Wednesday.

The bloc’s executive European Commission will propose next month the biggest renovation of its emissions trading system (ETS) since the policy launched in 2005. The ETS forces power plants, factories and airlines operating European flights to buy CO2 permits , creating a financial incentive to pollute. less.

The reforms are part of an EU policy package that Brussels will propose on July 14 as it strives to meet the EU goal of reducing net emissions by 55% by 2030, from 1990 levels. EU policies are designed to meet a long-standing climate goal and need to be updated.

A draft of the ETS proposal, first reported by Bloomberg News, said that the supply of CO2 permits in the ETS will face a one-time reduction.

The number of permits entering the EU carbon market each year will also decline at a faster rate, starting in the year after the reforms are implemented, according to the draft, without specifying how quickly the cap will drop.

The proposal would reinforce the ETS’s “market stability reserve”, a mechanism designed to prevent the accumulation of excess permits that could depress EU carbon prices.

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The price of CO2 permits in the EU ETS has skyrocketed to record levels this year and is currently trading at around € 56 per tonne.

When the ETS contains more than 1,096 million spare permits, the reserve would absorb 24% annually until 2030. When there are between 833 million and 1,096 million permits in circulation, the reserve would absorb enough permits to reduce that number to 833 million.

The Commission declined to comment on the proposal, which could change before publication. Member states and the European Parliament must negotiate final reforms, a process that could take about two years.

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Carbon-free permits will end for industries covered by the EU’s planned carbon border levy, according to the draft, a proposal that manufacturing sectors are expected to resist.

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The EU’s climate policy package will include a border tariff to force importers to pay for CO2 emissions incorporated in goods such as steel and cement. Importers’ tariffs per tonne of CO2 would be tied to the EU carbon price to try to put European companies on an equal footing with companies abroad.

Other industries would also get fewer free permits, under proposals to strengthen benchmarks that calculate free permits for each sector, while companies must demonstrate that they are investing in CO2 reduction to receive them.

The EU carbon market will expand to include maritime transport, which has so far not been covered. Emissions from sea travel within Europe and inbound travel to the EU would be covered, according to the draft.

It would also create a separate ETS for transportation and heating systems in buildings. Those sectors would face CO2 costs from 2026.

The Commission has said that it will use the revenue from the new ETS to create a fund to support vulnerable households, if their fuel bills rise as a result of the carbon pricing system (report by Kate Abnett; edited by Gabriela Baczynska and Barbara Lewis) .

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