EU reaches deal on major carbon market reform

EU member states and parliamentarians on Sunday announced an agreement for a major reform to the bloc’s carbon market, the central plank of its ambitions to reduce emissions and invest in climate-friendly technologies.

The deal aims to accelerate emissions cuts, phase out free allowances to industries and targets fuel emissions from the building and road transport sectors, according to a European Parliament statement.

The EU Emissions Trading System (ETS) allows electricity producers and industries with high energy demands such as steel and cement to purchase “free allowances” to cover their carbon emissions under a “polluter pays” principle.

The quotas are designed to decrease over time to encourage them to emit less and invest in greener technologies as part of the European Union’s ultimate aim of achieving carbon neutrality.

Negotiators representing member states and the parliament had spent more than 24 hours in intense talks before reaching an agreement on Saturday night that widens the scope of the European Union carbon market.

The deal means emissions in the ETS sectors are to be cut by 62 percent by 2030 based on 2005 levels, up from a previous goal of 43 percent. Concerned industries must cut their emissions by that amount.

The agreement also seeks

to accelerate the timetable for phasing out the free allowances, with 48.5 percent phased out by 2030 and a complete removal by 2034, a schedule at the centre of fierce debates between MEPs and member states.

The carbon market will be progressively extended to the maritime sector, intra-European flights and waste incineration sites depending on a favourable report by the commission.

A “carbon border tax”, which imposes environmental standards on imports into the bloc based on the carbon emissions linked to their production, will offset the reduction of free allowances and allow industries to compete with more polluting non-EU rivals.

The agreement also aims to make households pay for emissions linked to fuel and gas heating from 2027, but the price will be capped until 2030.

The commission had proposed a second carbon market targeting building heating and road fuels, but the plan raised concerns as European households grapple with soaring energy prices exacerbated by Russia’s invasion of Ukraine.

If energy prices continue to spiral, the application of this part of the agreement will be delayed by a year.

Funds from this second market will go to a “Social Climate Fund” designed to help vulnerable households and businesses weather the energy price crisis.