In pursuit of the “Fit for 55” environmental policy plan, an expansive and visionary strategy introduced by the EU Commission in July 2021, a profound revamping of the European Emission Trading System (EU ETS) is underway. The objective is clear: reducing net emissions by 55 percent by 2030 and attaining net zero emissions by 2050. At the forefront of this environmental transformation lie five pivotal legislative acts, collectively fortifying and expanding the ETS, thus establishing it as Europe’s primary environmental policy mechanism.

Directive 2023/959, adopted by the European Parliament on April 18 and ratified by the Council on April 25, 2023, is now in effect as of June 5, 2023. This directive amends Directive 2003/87/EC and Decision 2015/1814, providing the legislative foundation for the ETS and the Market Stability Reserve, respectively.

To understand the scope and significance of this directive, let’s first clarify the differences between regulations, directives, and decisions.

Elevating Emission Reductions and Accountability

Firstly, directive 2023/959 targets energy-intensive sectors such as power generation and aviation, setting an impressive emissions reduction target of 62% by 2030 compared to 2005. Previously, the target was 55%, highlighting the ambitious nature of the new goal. Additionally, free allowances granted to companies across all sectors will be gradually phased out by 2034, starting from 2026. This means that all participants in the ETS will bear the cost of their emissions, fostering greater accountability.

Market Stability Reserve for Equilibrium and Growth

The Market Stability Reserve, a reform introduced in this directive as a critical mechanism for maintaining equilibrium in the ETS, will undergo significant reinforcement. Originally established in 2019 to address the surplus of allowances resulting from the global financial crisis, the reserve regulates the supply of allowances through auctions. Under the reform, the reserve will double its input rate to 24% annually, and the minimum number of allowances allocated to the reserve will be raised to 400 million by December 31, 2030.

Charting New Frontiers under the EU ETS

Moreover, the ETS’s jurisdiction will expand to include emissions from shipping. Starting in 2024, shipping companies will be required to surrender allowances equivalent to a percentage of their verified emissions, increasing over time. (Click here for guidelines for shipping under the EU ETS). A parallel ETS will be established for construction and road transport to address sectors currently excluded from the ETS. This system will be implemented in 2027, with the possibility of a deferral to 2028, depending on gas prices. Furthermore, by the end of 2026, the Commission will assess the inclusion of emissions from municipal waste incineration in the scheme, which will be implemented by 2028.

Safeguarding Sustainability through CBAM

The directive also introduces a taxation mechanism called the Carbon Border Adjustment Mechanism (CBAM). This mechanism aims to counteract carbon leakage risks by taxing imported goods based on their embodied emissions. (Click here for 22 facts about the CBAM).

Empowering Communities and Innovation through ETS Profits

Lastly, the directive outlines the utilization of ETS profits. The revenue generated from the sale of allowances will contribute to establishing the Social Climate Fund, supporting individuals and businesses affected by rising energy prices, especially in heating and transportation. Additionally, the European Innovation Fund will receive further subsidies from the proceeds of ETS allowance auctions to foster innovative solutions in the fight against climate change.


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