ETS reforms: assessment of the Council and European Parliament positions

In June 2022 – a little less than one year after the Commission’s proposal – botht the Council as the European Parliament adopted their respective positions on the reform of the EU Emissions Trading System. These positions will serve as the negotiation basis for the trilogues between all three EU institutions which are expected to take place in the fall/winter of 2022.

Climact has updated its ETS model to include the final negotiation positions of both the Council and the European Parliament.

The updated model is open-source and can be downloaded here: [Download our ETS model here]

Key finding 1: both institutions largely maintain the cap size as proposed by the Commission

The Council position supports the Commission’s proposal for the tightening of the cap, via an increased annual Linear Reduction Factor (to 4.2%) and a one-off reduction of +- 117 million allowances. The European Parliament’s position does provide both a more stringent LRF, as well as a split one-off reduction of the cap (70 million in the year after entry into force and 50 million in 2026). However, the impact on the total cap for 2021-2030 will be limited, with the EP position decreasing the overall emission budget by +- 70 million tonnes of CO_2eq. The impact would increase however in the period after 2030.

Figure 1: cummulative emission cap for 2021-2030 under the different positions (in Mt CO_2eq.)

Key finding 2: under the Parliament’s position, projected supply would decrease by +- 320 million allowances, and member states’ auctioning volumes by 700 million

Even if the cap’s are relatively similar under all three positions, the European Parliament’s position would reduce actual projected supply by 321 million allowances compared to the Commission proposal. This is mainly driven by higher withdrawals by the Market Stability Reserve, whoms thresholds would be set at a lower level and decrease further in time in line with the cap.

Higher MSR withdrawals result in a decrease of member states’ auctioning volumes. This impact is further amplified by shifting more allowances from member states to the different funds (mainly the Ocean Fund and the Innovation Fund).

Figure 2: cummulative projected supply for 2021-2030 under the different positions (in million EUA(A)s)

Key finding 3: the strenghtened MSR under the Parliament’s position would lead to a stronger decrease of the surplus on the market

Under the Commission’s proposal (and Council position), the surplus would stabilize and even slightly increase in the period 2026-2030 between 500 and 600 million allowances. The decreasing MSR thresholds under the Parliament’s position would ensure a further decrease of the surplus to +- 100 million allowances by 2030[1]. This would provide a stronger guarantee that the EU will actually achieve its overall -55% reduction objective by 2030.

Figure 3: evolution of the surplus under the different positions (in million EUA(A)’s)

Key finding 4: lower phase-outs lead to higher free allocation volumes under both the European Parliament’s as the Council’s position

The slower phase out for sectors covered by a Carbon Border Adjustment Mechanism increases the total project amounts of free allocations by 180 million under the Council’s position, and by 32 million under the European Parliament’s position. The slower phase out under the Parliament’s position is partially offset by a larger scope of the CBAM regulation, which would also cover the hydrogen and polymers. The Cross Sectoral Correction Factor would not be triggered under either of the positions.

Figure 4: cummulative free allocations per sector in 2021-2030 (in million EUA’s)

[1] Projections assuming emissions would decrease by -62% by 2030