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, which was published in the Official Journal in June 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, a staged and careful approach, with the necessary impact assessment, is needed before extending the ETS to other sectors or emissions. Moreover, FuelsEurope believes that the implementation of the revised EU ETS Directive should be accompanied by thorough impact assessments and active involvement of all relevant stakeholders, ensuring that EU competitiveness is preserved.

Given the absence of global climate policies with a comparable ambition level to the EU ETS, and the strong exposure of the refining industry to international competition, FuelsEurope supports protection measures against the risk of carbon leakage that ensure that:

  • The most efficient installations are granted free allowances up to the benchmark to cover their direct emissions;
  • Electro-intensive sectors see their indirect related emissions costs being compensated.

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 increase dependency from third countries. Considering the international context, with third countries racing to attract investments from abroad (e.g. the recent US IRA) and the risk of EU companies to relocate to these countries, 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.