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European Parliament and Council adopt respective positions on EU ETS reform post-2020

The CBI continues to support the EU Emissions Trading Scheme (EU ETS) as the cornerstone of the EU’s efforts to achieve 40% cuts in carbon emissions by 2030 (based on 1990 levels). As a market-based system, the EU ETS has the best potential to reduce greenhouse gas emissions in the lowest cost way, and can create a clear market signal to drive low-carbon investment across Europe.  

The Council and the European Parliament, have both reached final positions on Phase 4 of the EU ETS, which will run from 2021-2030, and are now ready to start discussions on the reform to hopefully reach an ambitious agreement that works for all businesses. In light of the Paris Agreement, and a shift towards more ambitious climate change policy, it remains important to strike the right balance between ambitious climate targets and ensuring the global competitiveness of European industry.

The European Parliament agreed its initial negotiating position in mid-February and voted to keep the Linear Reduction Factor (the percentage of allowances removed annually from the market) at 2.2% following the Commission proposal, whilst underlining that this should increase to 2.4% in 2024 at the earliest. The CBI supports the increase to 2.2% but has warned that increasing the level further – whilst comparable measures are not in place elsewhere – could damage industrial competitiveness and risk ‘carbon leakage’ (European businesses moving their operations to other parts of the world) . Along with this, the European Parliament voted to have a 5% shift from auctioned allowances to free allowances, therefore giving more allowances to sectors most at risk of carbon leakage.

The Council, despite facing opposition, reached an agreement on their initial negotiating position at the end of February. Ministers followed the Commission and Parliament line in setting the annual LRF at 2.2% but, unlike the Parliament, did not suggest a higher level in 2024. In general, the Council’s position exceeds the Parliament’s by introducing clauses to write off excess allowances once a threshold has been reached but unfortunately Ministers only agreed to a 2% shift from auctioned allowances to free allowances, being less ambitious than the Parliament.

Now the Council and the European Parliament have agreed their respective positions, the ground is moving quickly, and discussions between the three EU institutions are expected to begin early April. Despite clear differences in the approach of the Council and Parliament, both are aligned on a number of aspects, so it is hoped that finding consensus may not be as difficult as expected. The CBI will continue to monitor these developments and engage with the relevant institutions and stakeholders to ensure the reform of the EU ETS post-2020 works for all businesses.

For more information please contact Elsa.