Climate Action

Commission launches second step to reform the EU ETS

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As part of the 2030 framework for climate and energy policies, the European Commission today presented a legislative proposal to establish a market stability reserve under the EU Emissions Trading System (EU ETS), to operate as of phase 4 starting in 2021.

Furthermore, in conjunction with a proposed target of reducing overall EU greenhouse gas (GHG) emissions by 40% below 1990 levels by 2030, a change is being considered in the level of the cap and the corresponding annual linear reduction factor determining it.

The Commission today also stated its intention to present a draft decision on the review of the carbon leakage list to the EU Climate Change Committee which would maintain the current criteria and existing assumptions. This would guarantee continuity in the composition of the list.

Market stability reserve

The proposed market stability reserve is intended to provide market participants with the necessary certainty as regards the auction supply during phase 3 and an appropriate lead-time for the introduction of the reserve. The reserve would both address the surplus of emission allowances that has built up and improve the system's resilience to major demand shocks in the future.

The proposal requires approval by the Council and the European Parliament to become law.

Linear reduction factor

In itself, the creation of a market stability reserve would not affect the linear reduction factor. However, the cap and consequently the annual linear reduction factor would also need to be changed from 1.74% currently to 2.2% from 2021 following an agreement in the EU institutions on the overall 40% GHG reduction target for 2030. This change would also help to address the market imbalance, but on its own would not be enough to solve it.

Carbon leakage

The Commission strives to guarantee continuity in the composition of the carbon leakage list for the current decade. It will also reflect on how best to take into account the competitiveness concerns of industry in an improved system of free allocation beyond 2020.

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