The ‘polluter pays’ principle is fundamental to the emissions trading system that has been in place in the European Union since 2005: energy-intensive industrial companies and power plant operators must have quotas for each ton of CO₂ emissions. Year after year, there are fewer emission quotas on the market, leading to an increase in their cost, and European industry is to become climate neutral in the long term. This Friday, the European Commission presented a long-awaited proposal to reform the Emissions Trading System (ETS).
Several member states and industries, including the chemical industry, insisted that the already crisis-ridden European industry should not be burdened. The Commission’s proposal partially takes this pressure into account but introduces a new condition: those seeking benefits in the quota system in the next decade must invest in ‘green’ transformation. In particular, the Commission proposes that the number of new emission quotas be reduced not by 4.3% per year, but only by 3.7% from 2031 and by 1.7% from 2036. In practice, this means that interested companies will have more time than previously planned to re-equip their production, which will likely curb the rise in the price of CO₂.
New conditions for free quotas
Almost equally significant is the proposal regarding the so-called free quotas. Until now, many industrial companies operating in international competition have received most of their quotas for free. This was intended to prevent the relocation of production abroad due to the emissions trading system. At the same time, this led to CO₂ reductions occurring mainly in the energy sector and to a much lesser extent in industry.
Now the European Commission seeks to introduce new conditions: from 2031, free quotas will only be granted to companies that at least present plans for climate-neutral production; they will receive part of the quotas only after the actual implementation of the corresponding investments. The member states will mainly monitor compliance with these conditions. Thus, Brussels aims to put an end to the practice of free-riding: some companies enjoyed privileges but hardly invested in production in Europe. The signal is clear: from 2031, the rules for industry will become stricter.
The role of member states in the green transformation
The reform of emissions trading also obliges EU member states to more actively create conditions for the ‘green’ transformation. Many companies complain that the necessary infrastructure in their countries is still lacking: there is not enough affordable green electricity, the connection to the power grids takes too long, and the infrastructure for hydrogen supply has not yet been created.
Industries such as the cement industry also need the ability to capture and store CO₂, emissions of which cannot be completely avoided. Investments in such technologies require a high price for CO₂ — only then do they become economically justified. This is where the main risk of the current reform lies: if the proposed changes weaken the price signal too much, the reform will lose its driving effect. In this case, even more will depend on the actions of the member states. Emissions trading brings in billions in revenue every year, but many countries currently direct only a small portion of these funds to support the transformation of industry. If the situation does not change, Europe faces further deindustrialization. The worst-case scenario is that companies will not be able to switch to ‘green’ energy, and the free distribution of quotas will end at the same time.
Overall, the EU’s emissions trading system remains one of the most effective tools of climate policy: it gradually pushes the most carbon-intensive productions, including coal-fired power plants, out of the market and stimulates the introduction of climate-neutral technologies. Therefore, the European Commission also proposes to extend the emissions trading system to all passenger flights departing from Europe to a distance of 5,000 kilometers, measured from the central aviation hub in Frankfurt am Main. Until now, the system only applied to flights within the EU. The new rules will cover flights to international hubs such as Dubai or Istanbul, which compete with transit airports like Frankfurt or Paris, but will not apply to further flights to the USA or China.
Source: Der Spiegel
