EU Reaches Deal to Bolster the Carbon Market

Dec. 20, 2022
By: Ashley J. Bodden

We have written for over a year about the coming importance of carbon policy in international trade. The U.S. has active proposals made to the EU about cooperation on the issue. An important step in the carbon regulation process was taken earlier in December when the European Union announced early Sunday that Members of Parliament (MEP) and the EU States had agreed to reform the Emissions Trading System (ETS) for lower emissions and more investments in green technologies.

The ETS is a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively. It allows producers and industries with high energy demands, such as steel, to purchase “free allowances” to cover their carbon emission under a “polluter pays” principle. The framework of the new deal is to accelerate emissions reductions, phase out free allowances to industries and target fuel emissions from the building and road transport sectors.

Emissions in the ETS sectors are required to be cut by 62 percent from the 2005 levels by 2030. The agreement lays out the timetable for phrasing out the free allowance, 90 million CO2 permits will be removed from the system in 2024, 27 million in 2026 and cutting the rate at which the cap on CO2 permits in the system falls by to 4.3% from 2024-2027 and 4.4% from 2028-2030. The Carbon Border Adjustment Mechanism (CBAM), on which MEPs reached an agreement with EU governments earlier last week to prevent carbon leakage, will also be phased in at the same speed that the free allowances in the ETS will be phased out. The new deal will also extend to the maritime sector, intra-European flights, and waste incineration sites.

The "carbon border tax", which imposes environmental standards on imports into the bloc based on the carbon emissions linked to their production, will offset the reduction of free allowances, and will allow industries to compete with more polluting non-EU rivals. The agreement will make households pay for emissions linked to fuel and gas heating from 2027, but the price will be capped until 2030. A separate ETS will be created targeting building heating and road fuels, however the plan raised concerns as European households are grappling with the soaring energy prices exacerbated by Russia's invasion of Ukraine. If energy prices continue to spiral, the application of this part of the agreement will be pushed back by a year.

The EU will also launch an 86.7-billion-euro fund to help consumers and small businesses cope with the CO2 costs and invest in energy-saving building renovations or electric vehicles - funded partly by revenues from the new EU CO2 market, and partly by national governments.

If you have any questions about imports, exports, or carbon border adjustments do not hesitate to contact any attorney at Barnes, Richardson & Colburn, LLP.