EU Carbon Market Reform Set to Include One-Off Emissions Cap Cut

The European Union’s executive is poised to propose a combination of tools to tighten the world’s biggest carbon market -- including a one-off reduction in the emissions cap -- and sync it with a stricter climate goal for 2030.

The European Commission is currently designing the deepest overhaul of the bloc’s Emissions Trading System since the program’s inception in 2005 as part of a broader package of measures to be proposed on July 14. The cut in the pollution cap will be accompanied by an increase in the rate at which the annual emissions limit shrinks each year, likely from 2026, according to two people with knowledge of the matter.

The EU cap-and-trade system is a central pillar of the region’s ambitious Green Deal strategy that involves deepening the 2030 emissions-reduction goal to at least 55% from 1990 levels and reaching climate neutrality by 2050. To become aligned with the new target, companies in the trading system will need to cut pollution by 63% by the end of the next decade from 2005, compared with 43% under the existing parameters.

The details of the planned reform -- which will also involve expansion of the market into new sectors and a cut in the number of free emissions permits -- may still change before it is adopted, said the people, who asked not to be identified because the discussions are private. The exact size of the one-off cut and the rate of annual reductions, known as the Linear Reduction Factor, are not included in the draft discussed by EU officials and will be decided later.

The commission has a policy of not commenting on draft legislation.

The overhaul will boost the scarcity of permits and is set to drive the cost of pollution higher, encouraging companies to shift away from fossil fuels. EU carbon prices jumped to a record 56.90 euros per metric ton last month, and some hedge funds predicted they could soar to as much as 100 euros later this year.

©2021 Bloomberg L.P.

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