THE STATE OF THE EUROPEAN UNION Towards a new legislative term

THE STATE OF THE EUROPEAN UNION 108 also failed to cover certain economic sectors with a con- siderable capacity to produce polluting emissions. These will now contribute to the climate goals. Another shortcoming of the previous ETS scheme was that it had prompted a relatively modest perfor- mance from heavy industry compared to the emissions reductions achieved by the energy sector. That was largely because the former had benefitted from the pro- liferation of “free emissions allowances”. As we shall see below, phasing out these allowances is a key ele- ment of the reform. The revision of the ETS and the rise in the price of CO2. Special treatment for the most vulnerable groups In general terms, the reform approved in April provides for tightening the emissions trading system via a gradual increase in carbon prices and a reduction in the number of allowances issued on the emissions market. The carbon price increase will come about through a decrease in the emissions caps established for the vari- ous sectors covered by the ETS. These gradual reductions in the caps have already been happening every year, but with the reform the pace of reduction will now step up considerably. The operators concerned will be able to emit fewer and fewer amounts of CO2 without penalty. The reform seeks to keep carbon prices at a high enough level to incentivise companies to pollute less. Carbon prices that are too low would make it impossible for the companies that opt for low-carbon new tech- nologies to compete with the more carbon-intensive industries. The EU’s decision to make the ETS more stringent is a politically risky one, particularly in circumstances like the immediate aftermath of the outbreak of the war in Ukraine, when energy prices in Europe hit all-time highs. These prices have since fallen considerably (gas is now nearly back at pre-war levels), though it will be neces- sary to remain very vigilant to their volatility for some time yet. Carbon prices currently stand at around 100 euros per tonne. The high prices mentioned above nevertheless re- quired the introduction of certain amendments during the negotiations in order to cushion the impact of the ETS revision on more vulnerable groups. First, separate and less exacting carbon markets are established for more socially sensitive sectors, like build- ings and road transport. Second, a new Social Climate Fund has been created to minimise the adverse effects on more vulnerable groups. The fund will amount to 86.7 billion euros and should go to compensating low- income households and small enterprises for the carbon price increases the change in the law causes them. Still, price limits on energy should mainly stem from a structural reform of a European electricity market that was the cause of serious inefficiency in the depth of the crisis. This measure would have a greater impact on energy prices and, contrary to what would happen if we weakened the ETS, it does not compromise achiev- ing the decarbonisation goals. Nor would it jeopardise strengthening European energy autonomy, which pur- sues less EU reliance on fossil fuel imports. Extending the ETS to new sectors The recently approved ETS reform will extend the emissions market to new sectors that had been exempt until now, like shipping, buildings or road transport.The ETS, then, will cover virtually every major emissions-producing sector. The reform, however, creates a different and separate emissions trading market for buildings and road trans- port (ETS II). There is particular social awareness regard- ing these sectors, given they directly affect citizens’ lives. Hence this special system provides for lower carbon prices and longer implementation timelines.The ETS II will not be operational until 2027, or even until 2028 should there be a sudden rise in carbon prices above 45 euros per tonne. Yet these safeguards cannot obscure the fact that the two sectors have huge emissions reduction poten- tial. According to UN data, the buildings sector is di- rectly or indirectly responsible for 36% of energy related GHG emissions in the EU and accounts for over 34% of global energy demand. Road transport, meanwhile, is responsible for a fifth of the EU’s carbon emissions. The reform also includes the maritime transport sector in the general emissions trading market (ETS I) from 2024. Emissions from this sector are higher now than in 1990.