On 17 September 2020 the European Commission announced possible changes to the EU ETS to help the bloc achieve a 2030 mitigation target of at least 55%, including sectoral expansion, a cap adjustment, and a sharper reduction trajectory.

Commission President Ursula von der Leyen first outlined the possibility of increasing EU climate ambition from at least 40% below 2005 levels by 2030 to 50% or 55% in July 2019, which also prompted the Commission to launch a study of the potential social, economic, and environmental impacts of increasing the EU’s 2030 target. Along with explicit support for a target of at least 55% by 2030, the Commission has released the results of the impact assessment (part one and part two) and policy options to reach the higher reduction goal. The package, forming the Commission’s 2030 climate target plan, is part of the Commission’s European Green Deal agenda to achieve climate neutrality by 2050.

These policy options, to be presented as legislative proposals by June 2021, include revisions and expansion of the EU ETS, adapting the Effort Sharing Regulation that applies to non-ETS sectors, strengthening energy efficiency and renewable energy targets, and establishing more stringent CO2 standards for road transport.

ETS revisions

The proposed revisions to the EU ETS would be arguably the most significant in its 15-year history, aiming to bring all sources of fossil-fuel combustion under a market-based pricing mechanism. Options for sectoral expansion include buildings and road transport through upstream coverage of heating and transport fuels, either through the existing EU ETS or as a separate ETS combining the two sectors. The EU ETS already covers the indirect emissions of buildings through district heating and electricity production, while an expansion would encompass most direct emissions from the sector.

The Commission also proposes to cover “at least intra-EU” maritime transport and evaluates its mitigation potential in the impact assessment. For intra-European Economic Area aviation, which along with electricity and industry is already included in the EU ETS, the Commission proposes reducing free allocation to improve the carbon price signal for the sector. The Commission underscored that it views international cooperation in these sectors as critical, supporting the inclusion of international emissions from aviation and maritime transport attributable to the EU into the EU ETS.  

Expanded coverage under an EU-wide trading system would shift the balance between the ETS and non-ETS sectors, for which member states have national emissions targets under the EU’s Effort Sharing Regulation. On adapting the Effort Sharing Regulation, the Commission offered no concrete proposals at this stage, citing a need for further deliberation and public consultation as the upcoming review of the climate policy framework proceeds.

Cap-setting and trajectory

The Commission acknowledged that a higher 2030 target will require increasing the linear reduction factor that determines the cap trajectory as well as other adjustments to the cap. The current 2.2% annual reduction factor for Phase 4 of the EU ETS (2021-2030) will need to be increased, the Commission said, but it did not offer a specific figure. A change in the linear reduction factor could be combined with a “one-off” reduction to the cap, given that actual emissions are currently higher than the nominal cap. The size of the increase in the linear reduction factor will depend on the starting year, expansion to other sectors, and potentially adjusting the baseline of the cap downwards (a so-called “rebasing”).  

While it is not discussed among the policy options, the role of the EU’s supply-adjustment mechanism, the Market Stability Reserve, in addressing the gap between actual emissions and the cap will be considered as part of its first review in 2021.

The Commission said it will continue to evaluate the implications of sectoral expansion and a tighter cap trajectory on the availability of free allocation for industries that are vulnerable to the risk of carbon leakage but that the impact assessment estimates, “at first sight”, a significant amount of free allocation would remain available even under a cap aligned with the 55% reduction target. The Commission is continuing to assess alternatives to free allocation, including a carbon border adjustment mechanism narrowly targeted to certain industrial sectors.

Projections on allowance prices

Allowance prices for ETS sectors by 2030 under a 55% reduction are estimated between €32 and €65, according to the impact assessment that accompanied the plan. The lower end of the range assumes no change to the EU ETS scope, instead relying mostly on higher targets on energy efficiency, renewable energy, and other standards relative to current policies. The higher end of the range assumes both more ambitious targets on energy efficiency, renewable energy, and other standards as well as an expanded EU ETS scope.    

Next steps

Increasing the 2030 target to at least 55% requires an amendment to the European Climate Law, which the Commission also presented on 17 September 2020. The amendment will be negotiated with the European Parliament and the Council of EU environment ministers to reach a compromise and submit the new target as part of an updated pledge under the Paris Agreement by the end of 2020. The EU Parliament Environment Committee backed a higher target of 60% in a vote on 9 September 2020. The full parliament will vote on the Environment Committee’s proposal during its 5-8 October 2020 plenary session.