EU integrates transport into emissions trading

The Federal Ministry for Economic Affairs and Climate Action (BMWK) considers the expansion of the European Emissions Trading System to almost all sectors, especially buildings and transportation, as a historic success. The agreement reached by the European Parliament, the Council, and the European Commission within the framework of the so-called trilogue process, will integrate around three-quarters of all European CO2 emissions and tie them to certificates or emission rights in the future. Their amount will continuously decrease – in line with European climate targets, according to BMWK. With this breakthrough, the previously difficult sectors of transportation and buildings across Europe will finally be held more accountable, the ministry welcomes the agreement. A market mechanism ensures that prices cannot rise too sharply and will be cushioned at over 45 euros per certificate. The EU has thus agreed on the central lever for reducing greenhouse gases by 2030 and is paving its way to full greenhouse gas neutrality by 2050.

“The EU is leading in climate protection and demonstrating determination – despite all crises. European climate policy ensures that we in the EU collectively take the path to climate neutrality, and it sets benchmarks for the implementation of climate policy worldwide," praised Federal Minister for Economic Affairs and Climate Action Robert Habeck.

To cushion the financial burden of additional CO2 pricing for lower-income households, a new climate social fund worth 65 billion euros is being established. With the border adjustment and the strengthening of the innovation fund, the agreement also provides a good balance in the decarbonization of European industry: it will have more time for decarbonization until 2030. The Commission will review by 2026 whether these regulations need to be modified. With the agreement on European emissions trading, most of the Fit-for-55 program has been negotiated. The program contains all the measures by which EU member states want to achieve their tightened climate targets - the EU’s CO2 emissions must fall by 55% by 2030 compared to 1990 levels.

“From a German perspective, the agreement is a breakthrough for climate protection, which simultaneously ensures the competitiveness of our European industry and the social cushioning of necessary climate measures. The decisions on 'Fit for 55' are central to making the EU less dependent on fossil fuels. They require a faster transformation but also promote the necessary investments. Moreover, the climate social fund ensures that the transition can be managed in a socially balanced way," added Habeck.

Stricter rules for emissions trading

The trilogue agreement envisages reducing the amount of CO2 certificates – the emission rights – in the EU Emissions Trading System (ETS-1) by 62% by 2030 compared to 2005 (previously 43%). The rules for the free allocation of certificates have also been extensively revised. In particular, efficient companies are to benefit from a free allocation in the future, while inefficient plants will have to fear cuts if they do not implement efficiency measures. The free allocation of certificates for the aviation sector and for certain industrial sectors that face intense international competition is to be phased out gradually.

Furthermore, the maritime sector will be included in emissions trading from 2024. This will mean that ETS-1 will then cover almost half of all European greenhouse gas emissions and the largest sources of climate-damaging greenhouse gases: in the energy sector, energy-intensive industries, as well as maritime and air transport. Part of the revenue will flow into the innovation fund, which aims to promote investments in climate-friendly technologies. An additional 20 million certificates have been added to the current size of the fund, which will be obtained, among other things, from the inclusion of maritime transport in ETS-2.

New emissions trading for buildings, transportation, and process heat

The agreement also envisages creating a new additional and standalone emissions trading system for buildings, road transport, and fuels in certain industrial sectors from 2027 – similar to the national German fuel emissions trading system. On the final stretch, it was possible to include additional emission quantities in the European ETS. The emissions covered should be reduced by 43% by 2030 compared to 2005. The amount of emission rights is to decrease annually by 5.10% and by 5.38% annually from 2028 onwards. Free emission rights are not envisaged, as prices should be passed on to consumers by fuel traders to achieve the necessary climate protection incentives.

Climate social fund cushions hardships

A new climate social fund will provide financial resources to member states to offset the social impacts of the proposed new emissions trading system ETS-II. The fund is mainly intended to support measures and investments in more efficient buildings and lower-emission mobility. The measures are mainly aimed at benefiting low-income households, micro-enterprises, or transport users. Temporarily, the fund can also finance direct income support for particularly vulnerable households. The fund has a total volume of 65 billion euros for the period 2026-2032 and will be largely financed by the revenues from the new ETS II for buildings and road transport. Additionally, member states will contribute with their own budgetary resources to the measures taken, so that a total of around 86 billion euros will be available for social compensation. An appropriate allocation key of the total funds will also ensure a pan-European solidarity adjustment among all member states.

CO2 border adjustment: For more fair competition

As decided last week, a CO2 border adjustment mechanism will be introduced from 2023 with a three-year trial phase. This "Carbon Border Adjustment Mechanism" (CBAM) will price imports from third countries without comparable climate protection requirements. It is intended to gradually replace the current central instrument for protection against carbon leakage, the free allocation of emission certificates, in the sectors covered by it by 2034. Initially, the CBAM will cover the electricity sector as well as the majority of emissions in the following industrial sectors: iron and steel, aluminum, cement, fertilizers, and hydrogen. The number of products covered by the CBAM is expected to increase over time. Through this mechanism, in future, CO2 emissions of certain energy-intensive products imported into the EU will also have a price. The mechanism will provide a level playing field for European companies subject to the EU Emissions Trading System (ETS-1) compared with companies from other economic regions, the EU believes. The negotiations to strengthen the requirements for renewable energies and energy efficiency, as well as some transport-related laws in the FitFor55 package, will be completed next year, the promise states.

The compromise now found brings the positions of the member states, the European Parliament, and the Commission together. The three institutions have negotiated in the so-called trilogue format. Only if all three sides agree can a legislative project come into force. The agreement must now be formally confirmed by the Council and the EP.