Reform of emissions trading

Authors: Johannes Hartlieb, Alexander Gimona

European emissions trading has undergone a comprehensive reform. What changes does the amendment bring?

EU ETS new – what changes does the reform bring?

In order to achieve the EU’s ambitious climate protection targets, the European Emissions Trading System (EU ETS) has undergone extensive reform. It represents an important component of the EU’s ambitious climate policy and is the central instrument for achieving a net emissions reduction of at least 55% by 2030. The reform is part of the “Fit for 55” package and constitutes the largest expansion of the system since its inception. Additional stationary installations that were previously not covered have been included in the trading system, the aviation sector is undergoing significant changes, maritime transport is being included for the first time, and there are also changes at the formal level.

The total amount of emissions allowances in the EU ETS will be reduced by 90 million tons in 2024, followed by a further reduction of 27 million tons in 2026. In addition, a linear reduction factor will be introduced, which will amount to 4.3% annually from 2024 to 2027 and 4.4% from 2028 to 2030. Furthermore, the free allocation of allowances will be gradually reduced until it is completely phased out in 2034. Last but not least, the emissions trading system will be synchronized with the CBAM system, particularly with regard to free allocation: companies producing CBAM goods (aluminum, steel, iron, etc.) will receive a lower free allocation. We have already reported extensively on the main legal bases.

Below, we provide an overview of the changes in the EU ETS and their national implementation.

Additional stationary installations will be included in the EU ETS

As of 2024, the scope for stationary installations will be expanded, with on the one hand further stationary installations being included in the EU ETS, and on the other hand adjustments being made to some activities already covered. These include, among others, oil refining, iron and steel production, primary aluminum production, the drying or calcination of gypsum, the production of gypsum plaster boards, the production of carbon black, and the production of hydrogen and synthesis gas. The provisions of the Austrian Act on Emissions Allowances (EZG) have applied to these newly included installations since January 1st, 2024. In Austria, this primarily affects gypsum and hydrogen production.

Formal changes

Formally, the reform results in changes to the recurring deadlines. The deadline for submitting the emissions and activity level report remains unchanged, and is set by March 31st. Instead of the previous deadline for booking the allocation of allowances by February 28th, this must, from 2024 onwards, be done annually by June 30th. Additionally, the deadline for submitting allowances for the previous year has been changed from April 30th to September 30th.

Waste incineration

Waste incineration plants could also be included in the European Emissions Trading System from 2028. The inclusion of plants for the thermal treatment of municipal waste in the EU ETS is currently still under review. However, since 2024, EU member states have been required to submit reports on related emissions to the European Commission. A potential inclusion in the EU ETS from 2028 will be assessed by mid-2026. In addition, the Commission is also examining the possibility of including other waste management processes, in particular landfills, which cause methane and nitrogen oxide emissions in the EU.

Reform of aviation rules

Aviation represents a particularly significant part of the EU ETS, which has undergone a number of changes. The often-criticized free allocation of emission allowances is being gradually, yet very rapidly, phased out. This year, 25% fewer allowances are already being allocated free of charge. A further reduction of 50% is planned for next year. From 2026, there will be no free allocation of allowances for aviation at all. In addition, from 2025, the so-called “non-CO2 effects” of air traffic will be included in the ETS, initially via monitoring, and later, it is expected, also through a levy. These include primarily methane, nitrogen oxides (NOx), water vapor, and aerosol emissions. According to recent studies, “non-CO2 effects” could have a greater impact on the climate than CO2 emissions and even account for up to two-thirds of the impact of aviation on the climate.

Inclusion of maritime transport

For the first time, maritime transport will also be included in the EU ETS. Emissions from voyages within the European Economic Area (i.e., the EU including Norway, Iceland, and Liechtenstein) as well as emissions at port will be fully accounted for. For voyages between the EEA and third countries, 50% of emissions will be considered. The inclusion of maritime transport will be implemented gradually from 2024. Initially, shipping companies will only need to surrender allowances for 40% of their emissions. This share will increase to 70% in 2025 and to 100% from 2026 onwards.

National implementation – EZG amendment

The EU ETS Directive had to be transposed into national law by December 31st, 2023. In mid-December 2023, the National Council adopted the amendment to the Austrian Act on Emissions Allowances (EZG). The most important changes include the newly defined “scope” in section 2(1) EZG 2011 (cf. Art. 2 of the EU ETS Directive), several new definitions, and the above-mentioned new deadlines.

Disclaimer

This article is for general information only and does not replace legal advice. Haslinger / Nagele Rechtsanwälte GmbH assumes no liability for the content and correctness of this article.