Apr 2

EU to Squeeze Carbon Market Amid Climate Goals

Dimitri Frolowsckii
Jul 2, 2021
Image: veeterzy on Unsplash

The European Union plans to decrease its dependence on fossil fuels with revisions to its carbon market in new legislative proposals, according to reports from Bloomberg and Reuters.

The supply of CO2 permits in the EU emissions trading system (ETS) will face a one-off reduction. Meanwhile, the number of permits entering the EU carbon market each year will decrease at a faster rate, according to Bloomberg,

The projected proposal would give the EU more space for maneuver when working to reduce its carbon footprint. The new mechanism will avoid a build-up of excess permits that could depress EU carbon prices.

According to Reuters, when the ETS contains more than 1.096 billion spare permits, the reserve would absorb 24 percent per year until 2030.

Free carbon permits will also end for industries covered by the EU’s planned carbon border levy. According to an analysis by the WWF, the free allocation to the sector of permits to emit CO2 under the EU emissions trading system meant EU governments missed a potential 54 billion euros in auction revenue between 2013 and 2019.

The policy package will also include a border tariff, which will force importers to pay for the CO2 emissions embedded in goods. Importers would be required to buy digital certificates, each representing a tonne of embedded carbon dioxide emissions.

Importers’ fees per tonne of CO2 would be linked to the EU carbon price to put European firms on a level footing with foreign companies. The border levy will apply in full starting from 2026, with a potential “transitional period” from 2023. It would apply to iron and steel, aluminum, cement, fertilizers, and electricity.

Because of this proposal, the EU carbon market will likely expand and include shipping, which has not been covered until now. More than 3 percent of global CO2 emissions can be attributed to ocean-going ships. Their inclusion into the carbon market is a significant step towards reducing this harmful environmental footprint.

The ETS is described as a cornerstone in the EU’s approach to achieving climate neutrality by 2050 and is an essential tool for cost-effectively reducing greenhouse gas emissions.

The revisions are part of a package of policies that will be proposed on July 14 to update and expand the scope of the ETS. The changes will be essential for achieving at least a 55 percent net reduction in greenhouse gas emissions by 2030. Last year, renewable power generation overtook fossil fuels for the first time ever in the EU.

The measures could further reduce carbon allowances and introduce additional prices on pollution from transportation and shipping and heating systems. If implemented, the steps may cut a significant volume of emissions and eventually help the continent achieve carbon neutrality.

Dimitri Frolowsckii

Dimitri Frolowsckii is a political and energy analyst with over 15 years of experience in journalism.

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