The Future of the EU Emissions Trading Scheme

EEF Report: The Future of the EU Emissions Trading Scheme
EEF Report: The Future of the EU Emissions Trading Scheme

In the six and half years between now and the next EU-ETS phase, the EEF have taken licence to think radically about what reform is required not just for the EU ETS, but the wider climate change policy framework it feeds into.

The report sets out’s EEF’s current thoughts on what reform is required to ensure the system can continue to deliver emissions reductions, at least cost, and without harming industrial competitiveness. It covers the innovations being developed in the steel industry, an assessment of the purpose and problems of the EU-ETS & offer proposals for reforms.

Under the ‘narrow lens’ scenario of modest reform, the following is proposed:

  • The introduction of a Market Stability Reserve (MSR) to reduce the surplus of allowances must seek primarily to address the surplus created by economic downturns rather than that created by actual improvements in performance (i.e. through renewables or energy efficiency).
  • An MSR must only be introduced as part of a package of reforms that ensure adequate protection is given to industrial competitiveness.
  • The system of free allocation must be reformed to ensure that those sectors at risk of carbon leakage are sufficiently protected from the costs  of the EU ETS. This will require revisiting the benchmarks, moving to free allocation based on actual production and ending the application of a  Cross Sectoral Correction Factor to freely allocated allowances.
  • The 900 million back loaded allowances, or additional surplus, should not be permanently retired but instead used to enable the reforms to free allocation and support carbon leakage sectors.
  • EIIs must continue to be compensated for the indirect costs of the EU ETS (and other climate change policy) reflected in electricity prices.
  • Governments must more fully reflect the difficulties inherent in decarbonising industry in its future policy. This will require fully taking on board the findings of the Industrial Sector 2050 Decarbonisation roadmaps, providing greater support to help industry commercialise key low carbon technologies and ultimately developing a comprehensive strategy for these sectors.
  • Governments must start to create a more complementary regulatory environment that takes account of the cumulative impacts of climate change, environmental and other regulation in the round. Notably, all industrial sectors will be asked to meet increasingly stricter environmental standards as a result of IED in the coming years and this will significantly impinge on industry’s ability to make improvements

The ‘wide’ lens aspect of the report considers some of the options for more radical reform of the EU ETS and of the wider climate change policy  framework in which it sits. It looks at how the EU ETS interacts with other policy mechanisms in the EU, the conflicts and inefficiencies that exist and poses a series of scenarios for how a reformed EU ETS and policy framework could look post 2020 and beyond. The scenarios presented are not intended to identify an industry preference for reform, but instead aim to facilitate a much-needed debate around the sometimes confused nature of climate change policy and how we can start to design a framework that delivers on its aims in a more cost efficient manner whilst allowing EU industry to grow and contribute to the transition to a low carbon economy.

The final rallying cry is for the EU Commission, Parliament and Council to provide a consensus position on what the EU ETS should be required to do from Phase IV onwards and how this will work alongside other policy aims and objectives. Here, the report provides four possible scenarios for how the EU ETS, and the wider decarbonisation policy framework, could look post 2020.

Now, is just the right time to open the debate on what form the EU-ETS should take from 1 January 2021 onwards as the start of a new EU Emissions Trading System (EU ETS) phase together with its new framework of targets and ambition to guide the European Union through to 2030.

A copy of the report can be downloaded at

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