EU Lawmakers May Back Key Elements of Carbon Market Overhaul

(Bloomberg) -- The European Parliament’s industry committee is likely to endorse the main elements of the European Union’s carbon market reform plan, backing the bloc’s green shift at a time of an unprecedented energy crisis. 

The committee will probably back a plan to accelerate pollution curbs by companies from utilities to steelmakers and cement producers, according to draft compromise amendments agreed among the biggest political groups before a vote on Wednesday. The European Commission, the bloc’s executive, proposed in July accelerating the rate at which the emissions cap shrinks each year to 4.2% from 2.2% now.

The overhaul of the cap-and-trade carbon program, the EU’s flagship climate policy tool, is part of a massive package of laws to meet the bloc’s Green Deal target of zeroing-out greenhouse gases by the middle of the century. The ambitious shift has been questioned by some member states, including Poland, after Russia’s invasion of Ukraine aggravated the energy crunch that’s pushed power, gas and carbon prices to records.

The planned vote by the ITRE committee, which has an auxiliary role in the legislative process, will be followed by a ballot by the lead environment committee next month and a decision by the full EU Parliament in June. In parallel, member states in the EU Council are discussing their own amendments to the reform. In the next step, those two institutions will start talks about the final shape of the law to bolster the carbon market. 

Lawmakers in the industry committee may also back the commission’s proposal to complement the faster pace of emissions’ cuts, known as the Linear Reduction Factor, with a one-time reduction to the pollution cap. The two together will translate into a 61% drop in the pollution limit by the end of this decade from 2005 levels, according to the EU’s executive arm.

As part of the compromise amendments published by the EU Parliament, the committee is likely to endorse the proposal to strengthen the Market Stability Reserve, a supply-control mechanism that helped shore up a glut of emissions permits in the past couple of years. It may also agree to launch an adjacent emissions-trading program for heating and transport fuels.

To better protect the European industry against competition from countries with laxer pollution rules, the lawmakers may seek changes to the way the bloc adjusts the carbon market to the planned levy on imported emissions. The compromise proposal calls for a transitional phasing-out of free carbon allowances, now offered to companies deemed at the biggest risk of moving production abroad.

Companies in sectors covered by the Carbon Border Adjustment Mechanism should continue getting free allowances until the end of 2027, before the allocation is reduced by 10 percentage points between 2028 and 2030 and by 17.5 percentage points later. By 2034, there should be no free permits.

“In order to protect the competitiveness of European exports, the transitional phase out of free allowances should not apply to the share of the domestic production intended for export in third countries without ETS or similar regulation,” according to one of the compromise amendments.

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