The European Council (EC) has endorsed the reforms of the EU emissions trading system (ETS) for the 2021-2030 period. Under the approved reforms, the cap on the total emissions volume will be reduced by 2.2%/year. The number of allowances that will be placed in the market stability reserve (MSR) will be doubled temporarily until the end of 2023. Besides, a new mechanism will limit the validity of allowances in the market stability reserve above a certain level starting from 2023. This will help the EU to achieve its commitment under the Paris agreement to decrease greenhouse gas emissions (GHG) by 40% by 2030.
Under the revised ETS directive, 57% of the allowances will be auctioned, but with a conditional lowering of this share by 3% if the cross-sectoral correction factor is applied. Free allocation rules will be revised to enable better alignment with the actual production levels of companies, and the benchmark values used to determine free allocation will be updated. Sectors at highest risk of relocating their production outside the EU will receive full free allocation; sectors less exposed to carbon leakage will receive 30% of free allocation and a gradual phase-out of that free allocation for the less exposed sectors will start after 2026.
The EU Emissions Trading Scheme puts a cap on the CO2 emitted by more than 11,000 EU installations in the power sector and energy intensive industry through a market-based cap and trade system. The MSR is meant to reduce the surplus of allowances on the ETS market, which is estimated at 1.7bn.