Amendments to the European Commission’s EU ETS proposal

Introduction

• Increase the ambition in the EU ETS. We welcome several of the Commission’s proposals to strengthen the EU ETS in line with the increased 2030 climate target, including the increased linear reduction factor (LRF) to 4.2% in combination with a one-off reduction of 117 million allowances as of 1 January 2024. We also welcome keeping the Market Stability Reserve (MSR) intake rate at 24% and increasing the Modernisation Fund with an additional 2.5% of the cap to further support the energy transition in lower-income Member States. The additional 2.5% cap should be calculated on the entire 2021-2030 period (just like the increased LRF).
• Lower the Market Stability Reserve (MSR) thresholds. The introduction of a buffer zone between the total number of allowances in circulation (TNAC) and the MSR’s upper threshold (833 million) is welcome, but its upper level of 1,096 million would weaken the effectiveness of the MSR (ceteris paribus). To address this, both the MSR’s buffer zone upper level (1,096 million) and the upper threshold for hedging (833 million) should be lowered to properly reflect an increasingly decarbonised economy and gradually declining hedging requirements. The exact levels should be determined through analysis to ensure a smooth market functioning.
• Reform the EU ETS product benchmarks as soon as possible. We welcome the Commission’s intention to revise the scope of the benchmarks for hydrogen and heat to avoid installations with decarbonised processes falling out of the ETS and to remove references to specific feedstocks and production processes. In the case of district heating and cooling, the revision should reflect different starting points and prevent a disproportionate increase of heating prices. The benchmark reform will speed up the adoption of newer, cleaner technologies. Such reform should happen as soon as possible and not wait until the start of the second half of Phase IV.
• Make the Modernisation Fund future-proof. Gas-based projects could be financed, provided that i) they are carried out as part of a credible decarbonisation plan in accordance with the 2030 climate target and the EU’s 2050 net-zero GHG emission target, ii) they are able to be upgraded for new decarbonisation technologies in the future and iii) electrification is not technologically nor commercially feasible at reasonable cost.
• Support the development of a European carbon market. The introduction of a Carbon Border Adjustment Mechanism (CBAM) for electricity is welcome, but ultimately its end goal should be to encourage neighbouring markets to develop their own carbon markets and link them to the EU ETS. Building on the successful link with the Swiss ETS, further linkages would support a larger, more stable carbon market and enable a level playing field with electricity generated at the other end of interconnectors.