The Linear Reduction Factor (LRF) is a key mechanism within the European Union Emissions Trading System (EU ETS) designed to reduce the total number of emission allowances in circulation over time. It represents the annual rate by which the cap on total emissions is decreased, supporting the EU's climate goals of reducing greenhouse gas emissions and achieving climate neutrality by 2050.
The LRF ensures a predictable and steady reduction in emission allowances, encouraging companies to innovate and transition toward low-carbon technologies. It is an essential element in aligning the EU ETS with long-term climate ambitions, as a tighter cap increases the scarcity of allowances, driving higher carbon prices and incentivizing emission reductions.
The LRF is periodically reviewed and adjusted to align with the EU's evolving climate targets, ensuring it remains an effective tool for emission reductions in line with scientific and policy goals (eg. from 2.2% to 4.3% from 2024-2027 and to 4.4% from 2028-2030).
It is predetermined by the EU and currently stands at 4.3%.