Council and Parliament reach provisional deal on EU ETS

The Council and the European Parliament reached a provisional political agreement on important legislative proposals of the ‘Fit for 55’ package that will further reduce emissions and address their social impacts. The deal is provisional pending formal adoption in both institutions.

The EU Emissions Trading System (EU ETS) is a carbon market based on a system of cap-and-trade of emission allowances for energy-intensive industries and the power generation sector. It is the EU’s main tool in addressing emissions reductions, covering about 40% of the EU’s total CO2 emissions. Since its introduction in 2005, the EU’s emissions have decreased by 41%. The agreement reached today makes the system more ambitious in order to cut down even further emissions.

The Council and Parliament agreed to increase the overall ambition of emissions reductions by 2030 in the sectors covered by the EU ETS to 62%.

The co-legislators agreed to a rebasing of the overall emissions ceiling over two years of 90 and 27 million allowances respectively and increase the annual reduction rate of the cap by 4.3 % per year from 2024 to 2027 and 4.4 from 2028 to 2030 (“linear reduction factor’).

The market stability reserve (MSR) will be strengthened by prolonging beyond 2023 the increased annual intake rate of allowances (24%) and setting a threshold of 400 million allowances.

The Council and Parliament agreed to reinforce the mechanism on excessive price fluctuations, including by providing for an automatic release of allowances from the MSR to the market.

Installations that will benefit from free allocations will need to comply with conditionality requirements, including in the form of energy audits and for certain installations climate neutrality plans. Additional transitional free allocations can be granted under certain conditions to the district heating sector in certain member states, in order to encourage investments into decarbonising that sector. The co-legislators agreed to delete the derogation for installations for electricity generation and move the remaining allowances into Modernisation Fund to support modernisation, diversification and sustainable transformation of the energy sector.

The Commission will assess and report by 31 December 2026 on the possibility of including the municipal waste incineration sector in the ETS with a view to including it from 2028 and assessing the need for a possibility of an opt out until 2031.

The Council and Parliament agreed to include maritime shipping emissions within the scope of the EU ETS. They agreed on a gradual introduction of obligations for shipping companies to surrender allowances: 40% for verified emissions from 2024, 70% for 2025 and 100% for 2026.

Most large vessels will be included in the scope of the EU ETS from the start. Big offshore vessels of over 5000 gross tonnage and above will be included in the ‘MRV regulation’ on the monitoring, reporting and verification of CO2 emissions from maritime transport regulation from 2025 and in the EU ETS from 2027. General cargo vessels and off-shore vessels between 400-5 000 gross tonnage will be included in the MRV regulation from 2025 and their inclusion in EU ETS will be reviewed in 2026.

In addition, the agreement takes into account geographical specificities and proposes transitional measures for small islands, ice class ships and journeys relating to outermost regions and public service obligations and strengthens measures to combat the risk of evasion in the maritime sector.

Certain member states with a relatively high number of shipping companies will in addition receive 3.5% of the ceiling of the auctioned allowances to be distributed among them.

The co-legislators agreed to include non-CO2 emissions (methane and N2O) in the MRV regulation from 2024 and in the EU ETS from 2026.