EU to link emissions trading reform to domestic industry investments – commissioner

The European Commission plans to make investments in domestic industries a requirement as part of its upcoming proposals to reform the EU’s flagship Emissions Trading System (EU ETS), business daily Handelsblatt reported.

The reform would have to ensure that companies which already invested in decarbonisation are rewarded and that the many others who are yet to catch up receive adequate protection, EU climate commissioner Wopke Hoekstra told the newspaper. “This means flexibility, but it is subject to conditions and requires investment to be made here in Europe,” he said. 

The EU has set a price on CO₂ emissions for companies to invest in emissions reduction. However, the system is scheduled for a mandatory review, and has increasingly faced headwinds as many businesses and industry associations demand adjustments that would weaken the rules – often referred to as making the system “more flexible”. 

Key points of debate include extending the system by several years to give industry more time to decarbonise, and changes to the planned phase-out of free emissions allowances to energy-intensive industries that compete internationally.

Under current rules, the emissions cap is set to reach zero by around 2039, meaning that no new allowances would be issued from that point and only existing unused ones remain on the market. Industry must submit a permit for each tonne of CO₂, and while most of these "allowances" are auctioned, a certain share is allocated free of charge to industries that face international competitors for which European rules do not apply. The aim is to prevent companies from relocating production from the EU to countries with weaker climate policies to avoid high carbon costs. 

Climate policy researcher Michael Pahle, head of the climate and energy policy working group at the Potsdam Institute for Climate Impact Research (PIK), has previously called for flexibilities for industry to be conditional on decarbonisation commitments, such as requiring companies to use funds saved thanks to the free allowances for climate investments. “After all, too much flexibility could signal to companies that, should headwinds arise in the future, policymakers will simply continue to relax the rules – which would reduce incentives to invest and, consequently, undermine credibility,” he warned in a recent paper. Likewise, think tank EPICO proposed to strengthen conditionality for receiving allowances. 

The European Commission is scheduled to present its proposals on 15 July. The Commission also proposed an “ETS Investment Booster” to provide industry with financial support. The scheme would come with a budget of 30 billion euros to finance projects for decarbonisation, said Commission president Ursula von der Leyen. Several environmental NGOs and EU member state governments have said that the EU ETS must be preserved, both as a crucial climate policy instrument and a way to safeguard competitiveness of European clean tech businesses.