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The revision of the EU Emissions Trading System (ETS) represents a huge opportunity to strengthen the Directive to ensure it is in line with the 1.5˚C target under the Paris Agreement. However, the European Commission’s proposal includes two major shortcomings that should be reconsidered. Firstly, the EU-wide 55% emission reduction target proposed is inadequate to achieve the goals of the EU Green Deal and the Paris Agreement, and it should be upgraded to 65%. Secondly, the proposal neglects to properly implement the polluter pays principle. The free handouts of emission allowances to large polluting industries represent a market failure which will lead to continued windfall profits to the sectors concerned.

To improve the European Commission’s proposal for the revision of the EU ETS, Carbon Market Watch makes the following recommendations:

1. Ensure that the Linear Reduction Factor (LRF) and the one-off reduction of the cap result in a 70% decrease in emissions by 2030 for the ETS sectors

2. Increase the intake rate of the Market Stability Reserve (MSR) to 36% from 2024 onwards; adopt declining thresholds that reach zero in 2030, and an automatic cancellation of allowances held in the reserve for more than three years to effectively handle the market surplus

3. Phase out free allocation of emission allowances to energy-intensive industries and remove the overlap between free allocation and the Carbon Border Adjustment Mechanism

4. Strengthen the transparency and fairness of the Innovation Fund and Modernisation Fund

5. Include stricter criteria for spending ETS revenues to ensure that member states spending goes to support climate action.

6. Require shipping companies to surrender allowances equal to 100% of their verified emissions as of 2023, and include all incoming and outgoing voyages under ETS.

7. Deleted article 26 of the ETS Directive to ensure that limits on greenhouse gas emissions can be set in environmental permits under the EU Industrial Emissions Directive.

8. Add Municipal Solid Waste incineration plants to Annex I of the ETS Directive to regulate this highly polluting sector and provide incentives for waste reduction.

9. Revise the zero rating of biomass greenhouse gas emissions in order to ensure that it fully reflects the balance of the net effect of the production and use of bioenergy and gets rid of perverse incentives that can increase greenhouse gas emissions.

More detailed information on each recommendation can be found in the position paper.