THE AMENDMENT OF THE ETS DIRECTIVE IN DETAIL

What it means for companies and the environment

The European Union (EU) is working hard to reduce greenhouse gas emissions and promote sustainable development throughout the region. One of the most important instruments in this context is the Emissions Trading Scheme (ETS), which has been in operation since 2005. On July 14, 2021, the EU Commission published a series of proposals as part of the so-called “Fit for 55” package to help reduce EU emissions by at least 55 percent by 2030 compared to 1990 levels. This article explains the proposed changes to the ETS Directive and what they mean for businesses and the environment.

Introduction to the ETS Directive and its purpose

The ETS is a market-based system that allows companies to buy and sell permits for greenhouse gas emissions. The goal of the system is to put a price on carbon and encourage companies to reduce their emissions by making pollution more expensive. The ETS covers more than 10,000 industrial facilities in the EU, including power plants, factories and other large emitters.

The ETS has been successful in reducing emissions in many sectors, but has also been criticized for not doing enough to address climate change. In response, the EU has proposed a number of changes to the ETS Directive to strengthen the system and make it more effective.

Overview of the amendment to the ETS Directive

The proposed changes to the ETS Directive are part of the EU’s broader efforts to reduce greenhouse gas emissions and promote sustainable development. The most important changes include:

Adjustment of the cap and the market stability reserve

Emissions in the EU ETS are to be reduced by 61 percent by 2030 compared to 2005 levels. To achieve this, the linear reduction factor (LRF) is to be increased from the current 2.2 percent to 4.2 percent. In addition, the cap is to be reduced once a year after it takes effect, so that a linear reduction is achieved between 2021 and 2030.

The Market Stability Reserve (MSR) will be strengthened and adjusted: The doubled curtailment rate from 12 to 24 percent of the quantity in circulation (TNAC) will be maintained until 2030. A smoothing mechanism is also introduced to avoid threshold effects. Air and sea traffic is included in the TNAC calculation. The amount of emission allowances held in the MSR will be limited to 400 million emission allowances.

Expansion of financial support for climate protection measures

In the future, member states are to use 100 percent of their revenues from the auctioning of emission allowances for climate protection measures or social compensation measures, instead of the current 50 percent.

Inclusion of other sectors

The ETS will be expanded to include aviation and maritime emissions. The inclusion of these sectors is expected to reduce emissions by around 64 million metric tons of CO2 equivalent per year by 2030.

The introduction of a carbon limit adjustment mechanism (CBAM).

The CBAM is a new tool that requires importers of certain goods to pay for the carbon emissions associated with their production. The aim of this mechanism is to ensure that companies outside the EU are subject to the same carbon prices as companies within the EU.

The most important changes in the amended ETS Directive

The main changes to the ETS Directive are the increase in the linear reduction factor and the reduction in the emissions cap. These changes will make it more expensive for companies to pollute and encourage them to invest in cleaner technologies.

The inclusion of aviation and maritime emissions is also significant, as these sectors have traditionally been excluded from carbon pricing. The CBAM is another important change that could have a significant impact on companies that import goods into the EU.

Implications for companies – higher costs or opportunities for innovation?

The proposed changes to the ETS Directive will have a significant impact on businesses across the EU. For some companies, higher carbon prices could mean higher costs, while for others there could be opportunities for innovation and investment in cleaner technologies.

Companies that rely heavily on fossil fuels, such as coal-fired power plants, are likely to be most affected by the changes. These companies may have to invest in cleaner technologies or face higher costs for their emissions.

On the other hand, there could be opportunities for growth and expansion for companies already investing in clean energy and low-carbon technologies. These companies may be able to sell surplus emissions allowances or use them to offset their own emissions.

Environmental impact – will the ETS Directive reduce emissions?

The ETS Directive is an important tool in the EU’s efforts to reduce greenhouse gas emissions and combat climate change. The proposed changes to the directive are expected to result in a significant reduction in emissions by 2030.

Increasing the linear reduction factor and lowering the emissions cap makes pollution more expensive for companies, which encourages them to invest in cleaner technologies. The inclusion of aviation and maritime emissions is also expected to result in significant emissions reductions.

However, the effectiveness of the ETS will depend on a number of factors, including the carbon price, the availability of low-carbon technologies, and the willingness of companies to invest in clean energy.

Timetable for the implementation of the amended ETS Directive

The proposed changes to the ETS Directive are expected to be implemented over the next few years. The exact timetable will depend on the approval of the European Parliament and the Council.

The changes to the linear reduction factor and emissions cap are expected to take effect in 2023, while the inclusion of aviation and maritime emissions is expected to take effect in 2026. CBAM is also expected to be implemented in 2026.

Requirements for the companies

Companies covered by the ETS must comply with the new requirements of the amended directive. This can include investing in clean energy technologies, reducing their emissions, or buying carbon credits.

Companies importing goods into the EU may also have to comply with CBAM, which could require them to pay for carbon emissions associated with their production.

Potential challenges and criticisms of the amended ETS Directive.

The proposed changes to the ETS Directive have been criticized in some quarters. Some argue that increased carbon pricing could lead to higher energy prices and hurt the competitiveness of European industry.

Others have criticized CBAM as potentially discriminatory and difficult to implement. There are also concerns that the inclusion of aviation and maritime emissions may not go far enough to address the environmental impacts of these sectors.

Comparison of the amended ETS Directive with other carbon pricing mechanisms.

The ETS is not the only carbon pricing mechanism used around the world. Other mechanisms include carbon taxes, cap-and-trade systems, and carbon offsets.

The ETS is similar to cap-and-trade systems that have been implemented in other regions, including California and Quebec. Carbon taxes are another popular mechanism, but they differ from cap-and-trade systems in that they put a direct price on carbon rather than capping emissions.

Conclusion and outlook for the ETS Directive

The proposed changes to the ETS Directive are a significant step forward in the EU’s efforts to reduce greenhouse gas emissions and combat climate change. Increasing the linear reduction factor and lowering the emissions cap are expected to result in significant emissions reductions by 2030.

However, the effectiveness of the ETS will depend on a variety of factors, including the carbon price, the availability of low-carbon technologies, and the willingness of companies to invest in clean energy.

Overall, the amended ETS Directive represents an important opportunity for companies to invest in cleaner technologies and contribute to a more sustainable future. The EU’s commitment to reducing emissions and promoting sustainable development is a positive step forward, and it is hoped that other regions will follow suit.

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