Priorities for the EU ETS review

Key messages

• Better account for competitiveness while preserving environmental ambition. BusinessEurope supports a central role of the ETS in EU’s post-2030 climate
  framework, as a key market-based tool to reach climate neutrality in 2050. However, the alarming situation for EU competitiveness must be acknowledged. Businesses are facing increased costs and fierce global competition while the enabling conditions to create a business case for decarbonisation are largely missing. The ETS review must be adjusted to the current challenges and post-2030 context.
• Introduce flexibilities to ensure long-term viability. According to the Commission’s own estimates, there will still be industrial emissions in 2039 when the current linear reduction factor (LRF) will reduce issuance of new allowances to zero. Firstly, ETS must be adjusted to enable the continued transition after 2040, by modifying the LRF to avoid an ‘ETS Endgame’ in 2040. Secondly, flexibilities to address hard-to-abate emissions could also include using allowances from the Market Stability Reserve (MSR), as well as introducing EU removals and high-quality international credits. The MSR must be made future-proof and adjusted to a new situation where allowances are becoming scarce, including by removing the invalidation rule. ETS revenues should be used to support the decarbonisation of the sectors covered by the scheme.
• Secure strong carbon leakage measures to level the playing field. The Commission should reconsider the planned phase-out of free allowances for all sectors. If CBAM does not prove effective in the assessment prescribed under the CBAM Regulation to be done in 2027, the phase-out of free allowances for CBAM-sectors shall be postponed. This must be taken into account in the ETS review. An extended carbon leakage list and a more realistic benchmark methodology is also needed, as well as removing the conditionalities for free allocation. The framework for indirect cost compensation should be preserved beyond 2030 and extended to more sectors and applied in more Member States. To avoid carbon leakage in the maritime and aviation sectors, alignment with global developments should be ensured.