Factsheets: The reform of the EU Emissions Trading System – a closer look

A reform of the EU Emissions Trading System is necessary and has now been initiated by the European Commission with its Fit for 55 package. How will these proposals affect Europe’s climate targets? What will be the direction of travel for the EU Emissions Trading System? What are the implications of an extension of the EU ETS to maritime transport and the proposed changes for aviation? And how will the Carbon Border Adjustment Mechanism work? The Oeko-Institut researchers explore these questions in four factsheets, based on their analysis of the Commission’s proposals.

The Fit for 55 package also contains other proposals that will contribute to achieving ETS objectives. They include reform of the Energy Taxation Directive and more ambitious targets for energy efficiency and renewable energies. (A further factsheet looks at the introduction of a new emissions trading system for buildings and road transport.)

Factsheet 1: Aligning the EU ETS and the Market Stability Reserve with the new EU climate change target for 2030

This factsheet outlines key aspects of the proposal for the EU Emissions Trading System (EU ETS) and the Market Stability Reserve (MSR). The most important elements at a glance:

1. The climate ambition for the EU ETS is to be increased. By 2030, emissions (including maritime transport and aviation) are to be reduced by 61% compared to 2005 levels. This target is to be achieved through a 4.2% linear reduction factor (LRF) and a reduction of the cap in the year after the amendment enters into force (equal to a reduction of 117 million allowances in 2024 if it enters into force in 2023).
2. The scope of the EU ETS is to be extended to maritime transport. This will increase the cap by 79 million t CO2e. A surrender obligation for 100% of emissions will only apply to maritime transport after the end of an introductory phase from 2026 onwards.
3. The system of free allocation for industry is to remain in principle. Free allocation for sectors covered by the new Carbon Border Adjustment Mechanism is to be gradually reduced from 2026 to zero in 2035.
4. No free allocation is to be granted to maritime transport; instead, all allowances will be auctioned. The free allocation for aircraft operators is to expire at the end of 2026.
5. The architecture of the Market Stability Reserve (MSR) is to be fundamentally unchanged. The doubled intake rate of 24% is to be extended beyond 2023 up to 2030. A special rule is proposed with a view to avoiding threshold effects when allowances are fed into the reserve. The number of allowances in the MSR is to be limited to 400 million and aviation and maritime transport are to be included in the calculation of the total number of allowances in circulation (TNAC).
6. Innovation and Modernisation Funds are to be increased, opened to other projects and countries and the allocation rules adjusted. In addition, Member States should invest 100% of the auction proceeds in climate protection measures and in supporting low-income households (previously 50%).
7. The Commission aims for rapid implementation of the proposals from as early as 2024.

Further information on Points 1-7 can be found in the Factsheet “Aligning the EU ETS and the Market Stability Reserve with the new EU climate change target for 2030”.

Factsheet 2: Introduction of a Carbon Border Adjustment Mechanism (CBAM) in the EU

The European Commission has proposed a Carbon Border Adjustment Mechanism (CBAM) for certain sectors in order to address the risk of carbon leakage if “differences in levels of ambition worldwide persist” as the EU accelerates its reduction targets. Under the CBAM proposal published by the Commission on 14 July 2021 (as part of the Fit for 55 package), the same carbon price will be paid for the GHG emissions associated with certain imported goods as in the EU ETS. This factsheet provides an overview of the proposed design features of the CBAM and how it is expected to function. The most important elements at a glance:

1. The European Commission’s main objective for the Carbon Border Adjustment Mechanism (CBAM) is to prevent the risk of carbon leakage via the regulation of the GHG emissions embedded in certain goods upon their importation into the customs territory of the Union. Furthermore, the CBAM is intended to strengthen the EU ETS and to encourage industry outside the EU and its international partners to reduce emissions.
2. The CBAM seeks to replace current measures against carbon leakage: free allocation of EU allowances (EUAs) and financial compensation for indirect emission costs in electricity prices.
3. The CBAM applies to the direct production-related (grey) emissions associated with certain imported goods (basic materials and basic products) from the cement, electricity, fertiliser, iron and steel and aluminium sectors. Following a review, the scope may be extended to other sectors and / or to indirect GHG emissions after 2025.
4. The CBAM is to start with a transitional period without financial obligations between 2023 and 2025. From 2026, importers are required to surrender CBAM certificates corresponding to the total embedded emissions in imported goods and will purchase these from a national competent authority. The CBAM price is based on average EUA auction prices from the previous week.
5. The CBAM will gradually take over leakage protection for the products covered and replace the current measures. From 2026 onwards, free allocation will decrease by 10% each year and be replaced completely by 2035. During this transition, the number of CBAM certificates to be surrendered will be adjusted to reflect free allocation for certain goods.
6. Countries involved in or linked to the EU ETS are excluded. Further countries could be excluded if agreements “ensure a higher degree of effectiveness and ambition to achieve decarbonisation of a sector”.
7. Some important design aspects will be clarified in subsequent implementing acts, such as the detailed methods for reporting and calculating the surrendering obligation.

Further information on Points 1-7 can be found in the Factsheet “Introduction of a Carbon Border Adjustment Mechanism (CBAM) in the EU”.

Factsheet 3: Extension of the EU ETS to maritime transport

The legislative proposal on the extension of the EU ETS to maritime transport envisages not only an amendment of the Emissions Trading Directive (Directive 2003/87/EC) but also an adjustment of the EU Monitoring, Reporting and Verification (EU MRV) Regulation (2015/757). The extension of the EU ETS to maritime transport is a part of a package of EU measures introduced to reduce emissions in this sector and to contribute to the EU climate targets. The most important elements at a glance:

1. The maritime sector should be integrated into the existing EU ETS in 2023. The number of emission allowances in the EU ETS will therefore be increased by 79 million in 2023. Allocation will take place entirely via regular auctions.
2. CO₂ emissions from ships with a gross tonnage above 5,000 should be covered by the EU ETS as follows: 100% in the ports of Member States, 100% between EU states, 50% on routes to/from EU ports.
3. The proposal is strongly based on the EU MRV Regulation (which should be adapted to the ETS by the proposal, although the revision process, which has been ongoing since 2019, has not yet been completed), particularly in terms of the point of regulation, ship type, size and verification process.
4. A transition phase is envisaged for 2023 to 2026, with the share of emissions for which emission allowances must be surrendered gradually increasing.

Further information on Points 1-4 can be found in the Factsheet “Extension of the EU-ETS to maritime transport”.

Factsheet 4: Aviation in EU ETS and CORSIA in the Fit for 55 package

Key aspects of the proposal for aviation in the framework of the EU Emissions Trading System (EU ETS) and the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and the proposals for the use of sustainable fuels in aviation, the Energy Tax Directive and the Renewable Energy Directive are outlined below.

1. EU ETS and CORSIA rules apply depending on the route: the EU ETS is applied for intra-European flights, and the CORSIA rules apply for flights to and from third countries.
2. EU emissions trading covers flights in and between countries in the European Economic Area (EEA) and flights to the UK and Switzerland. Flights to and from outermost EU regions will be added from 2024. The cap should decrease by 4.2% annually from 2024, i.e. the same linear reduction factor as for the stationary sector. Free allocation is to be phased out and replaced by auctioning all emission allowances earmarked for aviation.
3. Under CORSIA, aircraft operators are subject to reporting and cancellation obligations in their home countries. The reporting obligation has applied since 2019. From 2021, aircraft operators should have cancelled offsets for a part of their emissions on routes between countries participating in the CORSIA cancellation obligation to offset emissions growth in the sector. For EEA aircraft operators, the list of permissible offsets differs from that of ICAO to further avoid double counting of emission reductions. From 2027, participation in CORSIA will be mandatory for almost all countries except certain developing countries. Emissions trading rules will apply from 2027 for routes to and from countries not covered by CORSIA and not exempted from CORSIA as developing countries.
4. The ReFuelEU Aviation proposal for a regulation, the Energy Taxation Directive and the Renewable Energy Directive provide important stimuli for the use of sustainable fuels. A minimum quota for sustainable fuels and minimum taxes for fossil fuels should help create a secure sales market that contributes to the reduction of greenhouse gases in the aviation sector itself.

Further information on Points 1-4 can be found in the Factsheet “Aviation in EU-ETS and CORSIA in the ‘Fit for 55’ Package”.

Nora Wissner is a researcher in the Oeko-Institut’s Energy and Climate Division in Berlin. Her main area of work is climate policy and climate change mitigation in shipping and aviation.

Further information

All UBA factsheets on the reform of the EU Emissions Trading System

Oeko-Institut podcast: Wie viel Klimaschutz kann die EU? (How much climate change mitigation can the EU achieve?) Our podcast guest Sabine Gores is a senior researcher at the Oeko-Institut. She works on national and international climate policy, with a particular focus on European emissions trading and effort sharing and on the production and analysis of greenhouse gas emissions projections.