EU Reforms the Carbon Market


The 27 Member States approved five key texts of the EU’s climate plan on Tuesday night, agreeing in particular on the amount of a fund that is supposed to cushion consumers from the impact of a carbon market extended to cars and housing.

Meeting in Luxembourg, the European Union’s environment ministers adopted their common position on the objective of zero emission new cars by 2035, the distribution of climate efforts between States and the imposition of targets for natural “carbon sinks” (forests, etc.), before talks with MEPs to finalize these texts.

But the proposal for a “social climate fund”, another key part of the plan presented by the European Commission in July 2021, was the subject of bitter negotiations late into the night, threatening to block agreement on the other texts of the package.

The European plan is to oblige fuel and heating oil suppliers to buy allowances covering their CO2 emissions on a new carbon market, as is already the case today for electricity suppliers and certain industries.

Concerned about the additional costs for small businesses and the most vulnerable households, Brussels is proposing a “social fund” fed by the revenues of the new “housing and road transport” carbon market, in order to compensate for the impact of price increases, via “temporary” direct aid and the financing of work to reduce their energy consumption.

The EU-27 agreed on the principle, but disagreed on the size of the fund. Brussels was aiming for an amount of 72.2 billion euros for 2025-2032: far too high for a group of so-called “frugal” states (Germany, Denmark, the Netherlands, Finland…).

The EU finds a compromise

Berlin had proposed to reduce the share of the revenues from the new carbon market allocated to the fund to a mere 20 billion euros, so that a larger share of these revenues would go to national budgets. Germany had finally raised its proposal on Tuesday to 48 billion.

On the other hand, many Eastern and Southern European countries found the social mechanism largely insufficient. France, which holds the rotating presidency of the EU, has rallied the majority of states to a compromise of 59 billion euros for a shorter period (2027-2032). 11.5 billion from the carbon market revenues that were initially intended for the European “innovation fund”.

This strategy has increased the level of the social fund without further eroding the revenue from carbon emissions accruing to the states, the red line of the “frugal”.

Paris praised a “fairly balanced compromise”, noting that the Innovation Fund was “rather intended” for the rich regions, which should not suffer too much from seeing it cut. The agreement did not convince Poland, which denounced “decisions that risk undermining popular support for the climate plan. Latvia is also concerned that the fund is “too small and unable to respond to the challenges faced” and hopes that it will be increased during the upcoming negotiations with the Parliament.

Reform of the carbon market

States also agreed on Wednesday to phase out the free emissions allowances granted to certain industrial sectors, as a carbon tax on imports from third countries is phased in at the EU’s borders between 2026 and 2035.

The Council proposes a much more gradual pace of reduction than that advocated by Brussels and MEPs. The free quotas allocated to airlines would be eliminated by 2027.

Finally, the EU-27 have validated the inclusion of maritime transport in the carbon market, but with “transitional” arrangements for winter navigation, “public service” routes and services to small islands.

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