EU Plans More Flexibility for Industry in Carbon Overhaul

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(Bloomberg) — The European Union aims to give its ailing industrial sector more flexibility in an upcoming reform of the bloc’s flagship carbon market, while ensuring companies boost investment in clean technologies. 

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The overhaul of the bloc’s Emissions Trading System will seek to strike a balance between helping heavy industry shift to clean energy sources and encouraging those that decarbonize faster to continue their transition, according to a EU official. The European Commission is due to unveil the review on July 17. 

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As part of efforts to allay concerns from energy-intensive industries over Europe’s declining competitiveness, the commission wants to start as soon as next year a carbon-market fund based on 400 million allowances, said the official, speaking on condition of anonymity. The so-called ETS Investment Booster will last for three years and will grant allowances to eligible companies on a first-come, first-served basis. 

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Reforming the ETS has risen to the top of the political agenda. The spike in energy costs caused by the Middle East conflict has intensified concerns about Europe’s ability to compete with its trading partners. The commission wants to better use revenues from the carbon market to stimulate investment when recalibrating the system to align with its more ambitious target of cutting emissions 90% by 2040 from 1990 levels.

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The ETS Investment Booster will be the first stage of Europe’s planned Industrial Decarbonization Bank, with €100 billion in carbon market-based funding. In the second phase, after 2030, the IDB will use another 400 million carbon allowances to support projects mainly through competitive bidding for long-term arrangements known as contracts for difference, which help companies reduce price volatility risks. 

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The EU will also continue its Modernization Fund, which supports poorer member states in the transition away from fossil fuels, and will focus its Innovation Fund on helping first-of-a-kind, clean-tech projects, with 200 million allowances.

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The overhaul of the system will also include a slower emission-reduction trajectory to allow the issuance of permits after 2039, when the cap is set to drop to zero under current rules, the official said, confirming a Bloomberg News report last month. 

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While some member states have called for keeping the so-called Linear Reduction Factor unchanged at 4.4% per year, others have called for a cut to around 3%. The European People’s Party, the biggest group in the European Parliament, has demanded the LRF be lowered by at least one percentage point, starting in 2031.

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The Socialists and Democrats group, as well as the Greens, asked the commission to keep the rate at 4.4% till 2035, according to their letters seen by Bloomberg News. 

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“It is of critical importance to consolidate the role of the EU ETS and to steer the ambition level away from political polarization,” said Jos Delbeke, one of the system’s architects and currently a professor at the European University Institute in Florence. “It seems advisable to follow an emissions reduction path towards 2050 that is closer to a linear line rather than an accelerated effort in the coming years.”