15/04/2024

As part of the revision of Directive 2003/87/EC, the founding law of the European ETS, a new Emissions Trading System called ETS2 has been created, separate and parallel to the current one, which will cover CO2 emissions from fuel combustion in the construction and road transport sectors and in the small-scale industry not covered by the current ETS.

ETS2 will become fully operational in 2027 and will cover the upstream emissions of the sectors to which it applies. Therefore, rather than end consumers, fuel suppliers will bear obligations to monitor and report their emissions. The Commission will set the cap for the ETS2 to reduce emissions by 42 percent by 2030 compared to 2005 levels. All ETS2 allowances will be auctioned, and a portion of the proceeds will be used to support vulnerable users, households, and micro-enterprises through the creation of the Social Climate Fund. Member states must use ETS2 proceeds for environmental investments and social measures and maintain transparency in using the funds.

Monitoring and reporting of emissions will begin in 2025. As in the current ETS, ETS2 will operate by keeping a Market Stability Reserve (MSR) active, which will be used to artificially balance the supply of allowances in the market and control price stability by taking allowances if the supply is excessive and putting allowances in if there is insufficient or excessive supply of allowances in the market. This new system has a kind of “price cap,” a price stability mechanism. During the first three years of ETS2 operation, if allowances exceed 45 Euros, additional allowances can be issued from the MSR to meet an excessive price increase, specifically 20 million additional allowances. If gas or oil prices prove to be exceptionally high in 2026, the year before ETS2 comes into effect, the system could be postponed to 2028 to provide more flexibility.

Each year, ETS2 administrative entities must submit by April 30th a report on the previous year’s emissions, and from 2026, the data will have to be verified by an accredited body. From 2028, after verifying and reporting annual emissions, administrative entities must surrender the equivalent number of allowances by May 31st of the same year. Under the new rules, European countries will also have to measure, report, and verify emissions from municipal waste incineration plants starting in 2024, which could include these plants in the ETS from 2028 or 2030 at the latest.

In this context, it is necessary to add that the European Union is now exploring the possibility of creating a new ETS for the agricultural sector as well in an attempt to manage emissions from a critical sector governed by a stringent bureaucracy, which is making many protests among farmers. Agriculture was largely excluded from the European Commission’s February 6th recommendation for a 2040 climate target to reduce emissions by 90 percent, yet according to 2023 figures, it is responsible for about 13 percent of European emissions. There are several positions in the Commission:

  • Action could be taken at the level of individual farmers so that they are responsible for their emissions and, therefore, to keep producing, they have to buy allowances corresponding to the emissions they produce.
  • Farmers will be burdened with counting emissions that could be placed on feed or fertilizer producers or even food production.
  • Lastly, as proposed by Denmark, an emissions trading system should be created that rewards the least polluting farmers.

At the moment, however, applying the “Polluter Pays” principle might offer farmers a viable and perhaps more accepted policy approach to guide the transition to a sustainable agrifood system, with farming practices that reduce emissions and protect soils. Now, these ideas are still under discussion, but applying ETS2 will have a significant impact on the entire European agriculture sector and many production chains.

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