Increasing the ambition of EU emissions trading

The EU Emissions Trading System (EU ETS) is a cornerstone of the EU's policy to combat climate change and a key tool in reducing greenhouse gas emissions cost-effectively. It is the world's first major carbon market and remains its largest.

Since the EU ETS was introduced in 2005, emissions have been cut by around 43% in the sectors covered by emissions trading. These include power and heat generation, energy-intensive industrial sectors and commercial aviation within Europe.

Put together, these sectors today account for 41% of the EU’s total emissions, so their contribution is crucial to achieving the overall EU emissions reduction targets.

The European Commission is now proposing to revise the EU ETS as part of the Fit for 55 legislative package, in line with its more ambitious target of achieving net emission reductions of at least 55% by 2030, compared to 1990 levels.

• To build on the results achieved by the existing EU Emissions Trading System and adapt it to the increased ambition
• To put a price on pollution in other sectors to incentivise the transition to cleaner technologies

The Commission is proposing a new target to reduce emissions from the EU ETS sectors by 61% by 2030, compared to 2005 levels. This represents an increase of 18 percentage points compared to the -43% target under the existing legislation.

To reach this target, the Commission proposes a one-off reduction of the overall emissions cap by 117 million allowances (‘re-basing’), and a steeper annual emissions reduction of 4.2% (instead of 2.2% per year under the current system).

With a tighter cap on emissions, the Commission proposes changes to the free allocation of allowances in the EU ETS to reflect more accurately the technological progress and to incentivise further deployment of innovative low-carbon technologies. A new carbon border adjustment mechanism will put a price on the carbon content of imports of a targeted selection of products to ensure that ambitious climate action in Europe does not lead to ‘carbon leakage’. To ensure a smooth transition from one system to the other, free allocation will be gradually phased out as the mechanism is phased in for these products. The Commission proposes a gradual move towards full auctioning of allowances for aviation.

The Commission also proposes to strengthen the Market Stability Reserve, a system that has been addressing the surplus of allowances that has built up in the EU ETS since 2009 and improving the system's resilience to major shocks by adjusting the supply of allowances to be auctioned.

For the EU to reach the 2030 emissions reductions target, sectors currently outside the EU ETS need to step up their decarbonisation efforts. To this end, the Commission proposes to extend emissions trading to new sectors by:

• including emissions from maritime activities in the EU ETS
• introducing a new, separate emissions trading system to cover emissions from fuels used in road transport and buildings.

The proposed extension of the existing ETS to the maritime sector will cover CO₂ emissions from ships above 5000 gross tonnage and will apply to all emissions from voyages within the EU, 50% of emissions from voyages starting or ending outside the EU, and for emissions from ships at berth in EU ports. To facilitate a smooth start, surrendering obligations will be gradually increased in the first three years. Allowances will need to be surrendered for 100% of verified emissions from the fourth year (in 2027 for 2026 emissions). The proposal builds on the provisions in place for other EU ETS sectors, as well as the existing EU Monitoring, Reporting and Verification System for shipping, which tracks CO₂ emissions from ships calling at all EU ports.

The proposal for a separate, upstream system for road transport and buildings will regulate fuel suppliers rather than households and car drivers. The new system is designed to start in an orderly, smooth and efficient manner from 2026, while delivering a clear signal on ambition.

To address the social impacts of the extension of emissions trading to road transport and buildings, the Commission has also presented a proposal for a Social Climate Fund.

More generally, the Commission proposes that Member States spend the entirety of their revenues from the auctioning of emissions allowances under the EU ETS and the new system for climate action and energy system transformation, including measures to decarbonise the road transport and buildings sectors.

Finally, to overcome the low-carbon innovation investment gap and to address distributional effects of emission trading, the Commission proposes to increase the size of the Innovation Fund and the Modernisation Fund.

The legislative proposals will be transmitted to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions for further consideration under the ordinary legislative procedure.

In November 2020, the Commission launched a public consultation inviting stakeholders and citizens to submit their views on increasing the ambition of the EU ETS.

The 493 stakeholder contributions were summarised and informed the development of the proposals.

In addition to the public consultation, a targeted stakeholder survey was carried out between December 2020 and February 2021, accompanied by a targeted interview programme launched in January 2021 and concluded in February 2021, to inform the development of the ETS extension to the maritime sector.

For more information on the stakeholder process, visit the Better Regulation portal.

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