The ETS is the world's first international emissions trading scheme and has been seen at the EU's flagship policy to combat climate change. It sets a cap on the amount of GHG emissions that can be released from industrial installations in certain sectors. Allowances must be bought on the ETS trading market, though a certain number of free allowances is distributed to prevent carbon leakage.
It is important to see the ETS and CBAM together since the CBAM will progressively become an alternative to free allocations and compensation under the ETS regime. To complement the ETS, the CBAM will be based on a system of certificates to cover the embedded emissions in products being subsequently imported into the EU. The CBAM it is not a ‘cap and trade' system. Instead, the CBAM certificates mirrors the ETS price.
When the full CBAM regime becomes operational on 1 January 2026, the system will adjust to reflect the revised EU ETS. CBAM will only begin to apply to the products covered gradually and in direct proportion to the reduction of free allowances allocated under the ETS for those sectors.
The Council and the Parliament also reached a political agreement for a revised ETS regime in December 2022 and the Parliament adopted the revised ETS on 18 April 2023. In its press release the Parliament stated that emissions in the ETS sectors must be cut by 62% by 2030, compared to 2005, which is one percentage point more than proposed by the Commission. In order to reach this reduction, there will be a one-off reduction to the EU-wide quantity of allowances of 90 Mt Co2 equivalents in 2024 and 27 Mt in 2026 in combination with an annual reduction of allowances by 4.3% from 2024-27 and 4.4% from 2028 to 2030.
A separate new ETS II for fuel for road transport and buildings that will put a price on emissions from these sectors will be established by 2027. This is one year later than proposed by the Commission. As requested by Parliament, fuel for other sectors such as manufacturing will also be covered. In addition, ETS II could be postponed until 2028 to protect citizens if energy prices are exceptionally high. Furthermore, a new price stability mechanism will be set-up to ensure that if the price of an allowance in ETS II rises above 45 EUR, 20 million additional allowances will be released.
Parliament also voted to include, for the first time, GHG emissions from the maritime sector in the ETS and agreed to the revision of the ETS for aviation. This will phase out the free allowances to the aviation sector by 2026 and promote the use of sustainable aviation fuels.