THE STATE OF THE EUROPEAN UNION Towards a new legislative term

THE EUROPEAN GREEN DEAL AND CARBON LEVIES: THE CARBON BORDER TAX AND REVISION OF THE EUROPEAN EMISSIONS MARKET 107 transport and the infrastructure and alternative fuels to sustain them; or the conservation and enhancement of our natural carbon sinks. In the next sections, given their importance as far as achieving a net-zero economy is concerned, we shall analyse two Fit for 55 measures that the European Par- liament and Council approved in April 2023: the revision of the Emissions Trading System and the Carbon Border Adjustment Mechanism. They are market-correcting instruments in that they send out price signals adapted to the internationally agreed decarbonisation goals. The Emissions Trading System (ETS), a cornerstone of EU climate policy The ETS has been the EU’s primary climate policy instru- ment since its creation in 2005 and its current reform is a key part of the strategy contained in the European Green Deal. The EU is a pioneer in using the carbon markets as a means of driving the decarbonisation of the energy sector and industry. Several countries and zones in the world have gradually adopted (or are in the process of adopting) similar systems to the one established in Eu- rope. Other countries meanwhile have opted to use dif- ferent methods to achieve their decarbonisation goals. One example is the United States, which for the most part has favoured incentives and direct subsidies to reach the targets. Primarily, the ETS seeks to encourage industry to switch to green technologies that contribute to the eco- logical transition. The ETS is also a further manifestation of the “polluter pays” principle laid down in Article 191 of the Treaty on the Functioning of the EU (TFEU), as it requires companies to pay an additional cost for every extra unit of CO2 they emit. The ETS puts a price on carbon in the framework of an EU-wide emissions market. It is a variable mode of price-setting, as the amount depends on the supply and demand for the emissions allowances in circulation at any given moment. The ETS is based on a “cap and trade” system, in which the emissions market reacts to the price signals from the EU. The EU first identifies a series of carbon- intensive industrial sectors (power stations or certain in- dustrial facilities, like oil refineries or chemical and steel plants, for instance). Then the EU authorities determine the maximum carbon emissions (cap) each of these sectors can emit and issues permits or emissions allow- ances for the companies accordingly. Each sector’s cap decreases every year, the idea being to move towards compliance with the EU’s climate goals. The companies concerned must purchase an allow- ance to cover each tonne of carbon dioxide emitted and if they exceed the allotted quota, they suffer a penalty or pay extra. Emitters are penalised, then, for polluting above the threshold the EU has established for their sec- tor in each moment. Conversely, companies whose emissions levels fall below these thresholds accumulate emissions allow- ances that they can then sell to other participants in the European market. Emissions allowances are therefore tradeable on that market. Companies that emit more than their allowance can purchase extra allowances on the emissions market, while those that emit less can sell their surpluses. This creates an incentive to reduce emissions, since the com- panies that innovate and lower their emissions can sell the leftover allowances and obtain income from them. ETS performance evaluation The ETS has proven to be an effective means of lowering carbon emissions during its time in operation. In fact, the emissions of the sectors covered by the system have fallen by 41% since the EU launched it in 2005. Europe is the world region with the most demanding emissions allowance market and the one that has made most pro- gress towards decarbonisation to date. In the current circumstances, however, in which the escalating climate emergency has significantly increased the EU’s ambitions, it became necessary to revise the ETS. Under the previous scheme, the EU’s new decarboni- sation goals would have been unattainable. In fact, the sectors covered by the ETS would have to reduce their emissions by 62% to reach the 2030 goal. The ETS had