EU Emissions Trading System

As a key part of the “Fit for 55” package to meet European Green Deal objectives, in December 2022, the Council and the European Parliament reached an agreement on the final text of the revision of the Emissions Trading System (ETS) Directive, published in the Official Journal in 2023.

The revised ETS provides for an increased GHG emission reduction target (62% reduction by 2030, compared to 2005) and a strengthened Linear Reduction Factor (from 2.2% to 4.3% starting in 2024, and to 4.4% starting in 2028). ETS installations will be required to implement energy efficiency measures (in compliance with the provisions of the Energy Efficiency Directive), and those that perform above the 80th percentile of their respective benchmark curve will be required to establish Climate Neutrality Plans in order to avoid a reduction of free allowances. The most efficient installations, however, will be exempted from the cross-sectoral correction factor.

For steel, iron, cement, fertilisers, aluminium, electricity, and hydrogen, policymakers have agreed to phase out free allocation by 2034. This will be done by reducing free allocations, applying a yearly increasing CBAM factor as from 2026.

An ETS for fuel combustion in road transport and buildings, and additional sectors (ETS 2) will also regulate fuel suppliers from 2027, with the aim to achieve 42% emission reduction in 2030 compared to 2005 levels.

FuelsEurope supports the EU ETS as a cost-effective market mechanism for emissions reduction in the power and industry sector, and it has always supported a global ETS to include as much as possible societal emissions. However, the EU ETS no longer provides a viable business case for the decarbonisation of trade-exposed and hard-to-abate sectors in the EU, and the current trajectory of allowances to zero in 2039 is not sustainable for European industry. The current requirements to meet the EU’s ambitious targets are often not investable due to high regulatory costs, uncertain or unlikely returns, regulatory uncertainty, and lack of supporting mechanisms. As a result, rather than incentivising clean investment in Europe, the current framework risks incentivising carbon and investment leakage, leading to deindustrialisation, energy security, and increase in global emissions-related concerns.

Without a structural redesign of the EU policy framework that strengthens industrial competitiveness, creates clear market demand, and supports innovation, the system will keep driving carbon and investment out of Europe. Instead of enabling decarbonisation, it will undermine it.

Hence, we stress the urgent need for the following key actions:

  • Strong, consistent, and long-term carbon leakage protection for trade-exposed industrial sectors should be ensured.
  • Both domestic permanent carbon removals and high-integrity international credits should be part of the EU carbon market in the post-2030 framework.
  • Carbon capture and usage (CCU) should also be incentivised for the production of CCU fuels.
  • Allowance invalidation must stop, and previously invalidated allowances should be reinstated. Thresholds must be redefined to ensure market liquidity and price stability.
  • Robust demand-side policies that create markets for renewable and low-carbon products to unlock the business case needed for investments.

Given the absence of global climate policies with a comparable ambition level to the EU ETS, to deliver on Europe’s climate ambition while safeguarding industrial competitiveness, we need an enabling policy framework, protecting industry from carbon leakage, enabling carbon removals and international credits, incentivising CCU fuels, and driving demand for renewable and low-carbon products.

A preserved competitiveness also has a social aspect: should the EU industry relocate to other regions in the world, the EU economy would experience a significant loss in jobs and would have to rely on imports, which would impact the trade balance and energy security. Considering the international context, the EU has to balance the need for decarbonization with the necessary support for the competitiveness of its industry.

Read our Fit for 55 recommendations here.