The above three drafts are part of the EU’s emission reduction plan called “Fit for 55”. The goal of Fit for 55 is to reduce net greenhouse gas emissions in the EU by at least 55% by 2030 compared to 1990 levels, and to reduce net emissions to zero by 2050 and achieve carbon neutrality.
Emissions Trading System (ETS) reforms to raise emission reduction targets
ETS is the EU’s main policy tool for reducing emissions. It mandates power plants and industrial companies to purchase carbon dioxide emission permits when they generate environmental pollution, and sets a cap on the number of emissions permits that factories, power plants, and the aviation industry can obtain.
Earlier this month, the European Parliament was divided on whether to strengthen or weaken the ETS, preventing the European Parliament from reaching a final agreement on a comprehensive reform of the ETS. At the time, it was proposed that by 2030, the combined emissions of the industries covered by ETS would be reduced by 61% compared to 2005. The draft proposes to increase that reduction to 63 percent.
The new draft states that the above-mentioned 63% target is to further reduce the amount of carbon allowances circulating across the EU at one time, and increase the reduction of allowances year by year. The market’s annual cap on CO2 emissions permits will be reduced by 4.4% from 2024, 4.5% from 2026 and 4.6% from 2029, while 70 million permits will be cancelled in 2024 and 50 million in 2026.
“Carbon tariff” free quota to be phased out from 2027 to 2032
The new draft proposes to expand the Carbon Boundary Adjustment Mechanism (CBAM), or the collection of carbon tariffs, to include organic chemicals, plastics, hydrogen and other chemicals in addition to steel, petroleum products, cement, organic basic chemicals and fertilizers. The European Parliament also wants to expand to indirect emissions, that is, to include emissions related to the use of electricity by manufacturing companies.
The new draft proposes that by 2032, quotas exempt from carbon tariffs in the ETS trading industry will be completely eliminated, a deadline three years earlier than previously proposed by the European Commission. The specific annual target is to reduce the free quota for these industries to 93% in 2027, 84% in 2028, 69% in 2029, 50% in 2030, 25% in 2031, and 2032 in 2032. to zero.
New ETS II system for commercial buildings and transportation
The draft proposes to establish an independent new emission system ETS II from January 1, 2024 for the distribution of fuel for commercial buildings and road transport. A year earlier than previously proposed.
Different from the previous proposal, in order to avoid EU citizens from burdening more energy costs, this draft proposes that before 2029, ETS II will exclude residential and private transportation, and whether there is a change will be subject to a comprehensive assessment by the European Commission. .
Set up a Social Climate Fund (SCF) to subsidize people affected by energy costs ETS revenue can only be used to combat climate change
The European Parliament has agreed to set up a Social Climate Fund (SCF) to help the poorest people most affected by energy and transport cope with the increased costs of the energy transition. The draft foresees that the SCF will benefit households, small businesses and transport users, who are particularly vulnerable to the negative impacts of the carbon neutral process.
The draft stipulates that the SCF fund will provide financial support in two directions:
Address increases in road transport and heating fuel prices through temporary direct income support measures, such as lower energy-related taxes;
Long-term structural investment, possibly including some financial Stimulate, issue subsidized vouchers, subsidize or provide zero-interest loans.
The SCF is estimated to be funded by 25% of expected revenue related to the inclusion of commercial road traffic and buildings in the ETS, as well as proceeds from the auction of 150 million new ETS quotas.
The European Parliament stressed that the EU and its member states must use all ETS and ETS II system revenues for climate change-related actions or to train or retrain workers who may be affected by the green transition.
The European Parliament also proposed a significant expansion of the Innovation Fund, to be renamed the Climate Investment Fund, which supports innovation in technologies that will significantly help decarbonize the ETS industry.