The EU ETS, which enshrines the ‘polluter pays’ principle, is at the core of European climate policy and is key to achieving the objective of EU climate-neutrality. By putting a price on greenhouse gas (GHG) emissions, the ETS has triggered significant reductions in EU emissions, as industries have an incentive to reduce their emissions and invest in climate friendly technologies.

More ambitious targets have now been set out for the scheme, with emissions in the ETS sectors to be cut by 62% by 2030, compared to 2005. In order to reach this reduction, there will be a one-off reduction to the EU-wide quantity of allowances of 90mn tCO₂e in 2024 and 2,790mn tCO₂e in 2026 in combination with an annual reduction of allowances by 4.3% from 2024–2027 and 4.4% from 2028–2030.

The free allowances to industries in the ETS will be phased out from 2026 and disappear by 2034. Specifically, the allowances will be 2.5% in 2026, 5% in 2027, 10% in 2028, 22.5% in 2029, 48.5% in 2030, 61% in 2031, 73.5% in 2032, 86% in 2033, and 100% in 2034.

The Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage, on which MEPs recently reached an agreement with EU governments, will be phased in at the same speed that the free allowances in the ETS will be phased out. The CBAM will therefore start in 2026 and be fully phased in by 2034.

The CBAM will equalise the price of carbon paid for EU products operating under the EU ETS and the one for imported goods. This will be achieved by obliging companies that import into the EU to purchase CBAM certificates to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS.

The law aims to incentivise non-EU countries to increase their climate ambitions and ensure that EU and global climate efforts are not undermined by production being relocated from the EU to countries with less ambitious policies.

The new bill, reportedly the first of its kind, is designed to be in full compliance with World Trade Organisation (WTO) rules and will apply from 1 October 2023 but with a transition period where the obligations of the importer shall be limited to reporting. To avoid double protection of EU industries, the length of the transition period and the full phase in of the CBAM are linked to the phasing out of the free allowances under the ETS.

CBAM will cover iron and steel, cement, aluminium, fertilisers and electricity, as proposed by the EC, and be extended to hydrogen, indirect emissions under certain conditions, certain precursors as well as to some downstream products such as screws and bolts and similar articles of iron or steel.

Before the end of the transition period the EC will assess whether to extend the scope to other goods at risk of carbon leakage, including organic chemicals and polymers, with the goal to include all goods covered by the ETS by 2030. It also plans to assess the methodology for indirect emissions and the possibility to include more downstream products.

ETS II for buildings and transport
Meanwhile, a separate new ETS II for fuel for road transport and buildings that will put a price on emissions from these sectors is to be established by 2027. This is one year later than proposed by the EC. As requested by Parliament, fuel for other sectors such as manufacturing will also be covered. In addition, ETS II could be postponed until 2028 to protect citizens, if energy prices are exceptionally high. Furthermore, a new price stability mechanism will be set-up to ensure that if the price of an allowance in ETS II rises above €45, 20mn additional allowances will be released.

Furthermore, for the first time, the current ETS is to be extended to maritime transport in a bid to encourage ship owners and operators to use the best available technologies and to innovate, not only helping the climate but also improving air pollution in cities close to rivers and the coastline. Methane and nitrous oxide (N₂O) are to be covered, in addition to CO₂.

The ETS is part of the Fit for 55 in 2030 package, which is the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.