On 16 May 2023, new rules for the reform of the EU’s Emissions Trading System including for aviation and maritime, the Carbon Border Adjustment Mechanism and a new Social Climate Fund were published in the Official Journal of the EU. This is an important part of EU’s plan to reduce greenhouse gas (GHG) emissions by at least 55% by 2030 compared to 1990 levels. This forms part of the Fit for 55 package, and is in line with the European Climate Law.
Reform of Emissions Trading System
The reform of the Emissions Trading System (ETS) increases its ambition and seeks to further reduce industrial emissions. The key elements of this reform are:
Emissions in the ETS sectors must be cut by 62% by 2030 (compared to 2005 levels).
Emissions from shipping have been included for the first time.
Free allowances for the aviation sector will be gradually phase out with full auctioning to be implemented from 2026.
An ETS II for fuel emissions from the building and road transport sectors will be established by 2027 (this is intended to capture emissions which are not currently priced across the EU).
EU Carbon Border Adjustment Mechanism
The majority of the provisions of the new EU Carbon Border Adjustment Mechanism (CBAM) will apply from 1 October 2023. This is intended to be a safeguard against "carbon leakage" – i.e. where companies move carbon intensive production abroad to countries with less stringent climate policies in place than the EU, or where EU products get replaced by more carbon-intensive imports. CBAM is the EU's tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, to encourage cleaner industrial production in non-EU countries and to ensure that EU climate efforts are not undermined by production being relocated from the EU to countries with less ambitious policies.
The goods covered by CBAM are iron, steel, cement, aluminium, fertilisers, electricity, hydrogen as well as indirect emissions under certain conditions. Importers of these goods will have to pay any price difference between the carbon price paid in the country of production and the price of carbon allowances in the EU ETS. While the key provisions of the regulation will apply from 1 October 2023 this date marks the start of a transitional period, during which only reporting obligations will apply. Importers will have to submit a CBAM report containing information on the goods within scope of the CBAM.
A permanent system will enter into force on 1 January 2026, in which importers will need to declare each year the quantity of goods imported into the EU in the preceding year and their embedded GHG. CBAM will be phased in at the same speed that the free allowances in the ETS will be phased out.
On 13 June 2023, the European Commission launched a consultation process relating to the rules governing the implementation of the CBAM during the transitional period. The deadline for the submission of feedback on the draft Implementing Regulation is 11 July 2023.
Social Climate Fund
The EU Social Climate Fund (SCF) will be set up in 2026. Its purpose is to ensure that the climate transition will be fair and socially inclusive. Vulnerable households, micro-enterprises and transport users who are particularly affected by energy and transport poverty will benefit from this. When fully in place, the SCF will be funded from auctioning ETS II allowances up to an amount of €65bn, with an additional 25% covered by national resources (amounting to an estimated total of €86.7 billion).
1. Directive (EU) 2023/958 of the European Parliament and of the Council of 10 May 2023 amending Directive 2003/87/EC as regards aviation’s contribution to the Union’s economy-wide emission reduction target and the appropriate implementation of a global market-based measure.
1. Directive (EU) 2023/959 of the European Parliament and of the Council of 10 May 2023 amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union and Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading system.