European Commission unveils ETS overhaul to support industry

The European Commission has presented a review of the EU Emissions Trading Scheme (ETS) in an attempt to relieve pressure on industry while continuing towards meeting climate targets.

According to a Commission statement, the revisions will focus on four key pillars designed to promote “economic investments, resilience and competitiveness” while delivering on the 2040 climate target.

The review was presented alongside the European Electrification Plan, both of which are designed to boost Europe's competitiveness, decarbonisation and independence.

Ursula von der Leyen, President of the European Commission, said: “Today we are proposing to make Europe the world's first electro-powered continent. From lowering electricity prices to adapting our carbon market to the changing global realities, this is also an investment and independence plan. To keep the clean transition on track, bring relief to our industry, and support decarbonisation.”

Wopke Hoekstra, Commissioner for Climate, Net Zero and Clean Growth, added: “The EU ETS has proven that carbon pricing works. It has cut emissions, strengthened Europe's energy security and mobilised investment across our economy. Today’s proposal on the ETS review brings together three key goals: climate action, competitiveness, and independence. It advances climate action, by also transforming the ETS into a genuine engine for innovation and investment.”

Four pillars

The first pillar will focus on boosting investments. The Commission will establish the Industrial Decarbonisation Bank to provide €100 billion in funding to industrial decarbonisation projects, ensuring a higher share of EU ETS revenues are returned to sectors covered by the EU ETS.

The Innovation Fund will be maintained as the key tool to bring low carbon innovation to market and Member States will be required to spend 50% of their national ETS revenues on investments to decarbonise ETS sectors.

The second pillar aims to bring relief to industry while guaranteeing a robust EU carbon market. To this end several measures will be implemented.

The Linear Reduction Factor (LRF) of 3.7% for 2031 will be updated to 2035 and 1.7% for 2036-2040.

A facility will be established to consider the purchase of high-integrity international credits from 2036 to create additional emissions space in the EU ETS while maintaining the 90% target.

The integration of 250 Mt high-quality permanent domestic carbon removals in ETS will kickstart the market for removals provide more “breathing space for EU industry”.

Dynamic reserve

The Market Stability Reserve will be made more dynamic, and the Commission has committed to modernising free allocation by extending benchmark-based allocation beyond 2030.

Industry will also benefit from reduced administrative compliance costs and simplification elements.

The third pillar will focus on EU solidarity through the Modernisation Fund using ETS funding to improve energy systems and promote industrial decarbonisation in lower-income Member States.

The fourth pillar looks to accelerate the decarbonisation of the maritime and aviation sectors, integrate municipal waste incineration, and provide further support to Sustainable Aviation Fuels through an economy-wide approach.

The Commission states clearly that the EU ETS already provides one of Europe's strongest investment signals and gives businesses and investors the confidence to invest in cleaner technologies, encouraging a shift to cleaner energy.

These revisions are therefore designed to strengthen the EU ETS as Europe's investment engine for industrial decarbonisation by modernising it and reinforcing investment instruments to help businesses decarbonise industrial production while remaining competitive.

Industry response

The response has been positive thus far. Marion Labatut, EU Affairs Director at EDF said in a LinkedIn post: “EDF together with Cleantech for Europe, Union Française de l'Électricité (UFE) and other key players support an ambitious revision of the EU ETS,” adding “ETS revenues must be used to help industry decarbonise.”

Dr Siegfried Scholz, President of ESWET, has also issued a comment: "The Commission has recognised that introducing the Waste-to-Energy sector into the EU ETS requires more than a carbon price. The proposed gradual transition, together with support for investment, carbon capture, support for district heating, and closer alignment with the Circular Economy Act, provides a strong basis for reducing emissions while continuing to deliver safe waste treatment with low emissions, energy recovery, and valuable secondary raw materials. The challenge now is to preserve this balanced approach throughout the legislative process."

ESWET’s statement emphasises that the “Commission's proposal establishes a balanced basis for the legislative discussions ahead. As the European Parliament and the Council begin their negotiations, it will be important to preserve the key elements that make this transition both environmentally effective and practically achievable.”