EU Set to Slow Carbon Cuts to Give Industry More Time to Adapt

The European Union is set to slow cuts to emission limits in its flagship carbon market over the next decade, giving heavy industry more time to rollout clean technologies while keeping the bloc on track for climate neutrality by 2050.

(Bloomberg) — The European Union is set to slow cuts to emission limits in its flagship carbon market over the next decade, giving heavy industry more time to rollout clean technologies while keeping the bloc on track for climate neutrality by 2050. In a planned overhaul of its Emissions Trading System due to be published later this week, the EU is seeking to strike a balance between lowering the burden of the transition for the industry and encouraging those who decarbonize faster to keep investing in Europe.

The reform has risen to the top of the bloc’s political agenda as some governments and energy-intensive companies blame the carbon market for boosting the already high power and gas prices. The European Commission is considering lowering the rate at which the emissions cap shrinks every year to a yet-to-be-determined number within the 3.5%-3.9% range in 2031-2035, according to people familiar with the matter. In the next step, the so-called Linear Reduction Factor would fall further to somewhere between 2% and 2.4% from 2036, said the people, who asked not to be identified commenting on internal talks.

The commission declined to comment, in line with its long-standing policy of not commenting on ongoing work. The reform proposal is due to be adopted on July 17 when EU commissioners meet to discuss its final design. Started in 2005, the ETS imposes gradually shrinking emissions limits on around 10,000 facilities in sectors from steel to cement to fertilizers.

The commission wants to recalibrate the market to align with its more ambitious target of cutting emissions by 90% by 2040 from 1990 levels. The slower emissions-reduction trajectory will allow the issuance of some permits after 2039, when the cap is set to drop to zero under current rules. While some member states have called for keeping the LRF unchanged at 4.4% per year over the next decade, others have urged a cut to below 3%.

Increased Spotlight There has been an increased spotlight on carbon costs after energy prices rose due to the Middle East conflict exacerbating concerns over Europe’s declining competitiveness against the US and China. Ten member states including Italy, Poland, Greece, Romania and Estonia warned the commission on Wednesday that the pace of emissions cuts risk pushing industries out of Europe. “Extending the ETS cap closer to 2050 is therefore necessary,” the nations said in a statement seen by Bloomberg.

“This adjustment should be introduced as soon as possible as our industries are under acute pressure facing immediate and irreversible costs.” To offer companies in the system more flexibility, the commission also wants to integrate 250 million tons of high-quality domestic carbon removals, created by projects that remove carbon dioxide from the atmosphere. It also plans to allow international credits accounting for 2% of the ETS cap, according to the people.

The design would be reviewed in 2033. Another key element of the reform will be an overhaul of the Market Stability Reserve, which is a mechanism that automatically controls the supply of permits by absorbing or releasing allowances from circulation, according to the people. The MSR will be made more dynamic, with its parameters adjusted to the shrinking market after 2030, as reported by Bloomberg last month.

The rate at which it absorbs allowances will drop to 12% from the current 24%, a change that will mean more permits can stay in the market for longer.