What is the future of the EU ETS?

The European Union Emissions Trading Scheme (EU ETS) stands today as the cornerstone of EU policy in the fight against global warming, established in 2005. Nevertheless, the scheme undergoes regular reviews and enhancements to effectively address emissions reduction. Recently, the non-profit Carbon Markets Watch published a comprehensive timeline detailing upcoming reviews within the ETS. We are offering an overview of the forthcoming developments, as well as a recap of the most important EU ETS reviews from the past few years. 

• What have been the revisions of the EU ETS before 2024? 
• The EU ETS reforms in 2024 and after 
• The EU ETS and the Aviation Sector before and after 2024
• The EU ETS and the Shipping Industry in 2024 and after
• The EU ETS and the CBAM in 2024 and after
• The EU ETS and waste incineration after 2024
• The EU ETS II in 2024 and after

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What have been the revisions of the EU ETS before 2024? 

What was the EU ETS like when it was created in 2005? 

During its initial phases, the EU ETS had a narrower scope and lower volumes compared to its current scale. Throughout the first two phases, it primarily focused on establishing the framework for carbon pricing and implementing the necessary infrastructure to monitor, report, and verify emissions from covered businesses. Most allocations were provided to installations free of charge during this period, and businesses had the option to purchase international credits to meet compliance requirements.

The EU ETS cap and issuing reforms before 2023

In Phases 1 and 2, the EU cap was a sum of estimates specific to individual countries, but in Phase 3, it became unified across the Union. Additionally, auctioning became the default method of issuing allowances instead of granting them for free. Also, the use of international credits was phased out after 2021.

EU ETS carbon allowances under the Mifid II 

In 2018, EUAs were designated as a financial instrument under the Directive on Markets in Financial Instruments (MiFID2), and reform in the cap and trade scheme opened the market to more participants. This change enhanced the regulatory standards of the EU ETS, introducing greater transparency and implementing measures against manipulation and money laundering.

The Market Stability Reserve in the EU ETS 

The Market Stability Reserve (MSR) became operational in 2019 to regulate the imbalance between the supply and demand of emission allowances, thereby stabilizing carbon prices. To simplify, whenever there is a surplus of allowances in circulation, the MSR takes out a proportion in order to tighten the market and bring an upward price drive. 

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The general EU ETS reforms in 2024 and after 

Here are the main changes and reviews (from 2024 and after) when it comes to the EU ETS as a whole:

• From the beginning of 2024 to the end of 2027, the EU ETS cap reduces by 4.3% annually.
• By the end of 2024, the European Commission will conduct a review of the Modernisation Fund's investment areas and the criteria used by the investment committee.
• In the first half of 2026, the European Commission will release its assessment of the Market Stability Reserve functioning.
• In the second half of 2026, the European Commission will publish a review of the ETS Directive.
• The Social Climate Fund will be launched in 2026, aimed at raising up to €86.7 billion to support climate initiatives.
• From the second half of 2026 to the first half of 2027, the EU will deliberate on the potential inclusion of carbon removals in the EU ETS.
• From 2028 to 2031, the EU ETS linear reduction factor will decrease by 4.4% annually.
• In early 2029, member states will be required to review their National Social Climate Plans (NSCPs) as part of the Social Climate Fund's evaluation process.

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The EU ETS and the Aviation Sector before and after 2024

The aviation sector in the EU ETS before 2024

As of now, aviation operations within the European Economic Area, including departing flights to Switzerland and the United Kingdom, fall within the jurisdiction of the EU Emissions Trading System (EU ETS). In 2023, only 22% of emissions from flights departing from Europe were effectively covered by the EU ETS.

The aviation sector in the EU ETS after 2024

In the upcoming years, several significant changes are anticipated in the EU Emissions Trading System (EU ETS) concerning aviation:

• By the end of 2024, there will be a reduction of 1/4 in the free allowances allocated to airline flights within the EU.
• From the beginning of 2025 to the end of 2027, airlines will be required to monitor, report, and verify their non-CO2 emissions, including nitrogen oxides (NOX), contrail-cirrus clouds, sulfur dioxide (SO2), particulate matter (soot), and water vapor.
• Between 2025 and 2026, flights within the European Economic Area will lose 50% of their free allowances, with the remainder phased out by 2026.
• Starting in 2026, apart from 25 million allowances for non-fossil aviation fuels, no additional free allowances will be allocated to the aviation sector.
• In the second half of 2027 and into 2028, flights between the European Economic Area and airports outside the EEA may be considered for inclusion in the EU ETS.
• By the end of 2027 and the first half of 2028, the European Commission will assess data from the monitoring of non-CO2 emissions since 2025 to determine their potential inclusion in the EU ETS.
• In early 2028, the European Commission will evaluate whether the distribution of free allowances to support non-fossil aviation fuel uptake should cease in 2030 or continue until 2034.
• By 2029, expansion of the ETS for aviation to cover flights between the EEA and non-EEA airports may occur if the International Civil Aviation Organization (ICAO) fails to reform the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to align with the Paris Agreement goals.

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The EU ETS and the Shipping Industry in 2024 and after

The shipping sector in the EU ETS in 2024

Starting from January 2024, the European Union's Emissions Trading System (EU ETS) has expanded to include CO2 emissions from all large ships, with a gross tonnage of 5,000 and above, entering EU ports, irrespective of their flag registration. The system encompasses 50% of emissions from voyages beginning or ending outside the EU, and it covers 100% of emissions from travels between two EU ports and from the time when ships are within EU ports.

The shipping sector in the EU ETS after 2024

In the coming years, there will be changes in the EU Emissions Trading System (ETS) concerning shipping:

• By 2024, emissions coverage for ships within the EU will incrementally increase from 40% to 100% by 2026, while only 50% of emissions for ships traveling between EU and non-EU ports will be covered until a revision in 2028.
• From early 2025 to late 2026, monitoring, reporting, and verification requirements will commence for all offshore ships and smaller general cargo ships (ranging from 400 to 5,000 gross tonnage).
• By 2027-2028, the ETS for shipping will expand to include offshore ships exceeding 5,000 gross tonnage and may potentially incorporate smaller offshore and general cargo ships.
• In 2028, the ETS coverage will extend to shipping emissions on journeys between EU and non-EU ports if the International Maritime Organization fails to establish effective mechanisms for reducing the sector's climate impact.

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The EU ETS and the CBAM in 2024 and after

The CBAM of the EU ETS in 2024

The Carbon Border Adjustment Mechanism (CBAM) Regulation aims to prevent carbon leakage and ensure the effectiveness of EU climate policy by creating a level playing field between EU producers under the EU ETS and foreign producers. Additionally, it encourages third-country governments and producers to adopt greener policies and reduce emissions. The CBAM initially covers the following sectors: cement, electricity, fertilizers, iron and steel, aluminum, hydrogen, and related products. During the transitional period from October 1, 2023, to December 31, 2025, only reporting requirements are enforced.

The CBAM of the EU ETS after 2024

Here is how the EU ETS CBAM is expected to evolve in the years to come:

• By the fourth quarter of 2025, there will be a review and legislative proposal on CBAM's impact on least-developed countries.
• In 2026 the reduction of free allowances for CBAM sectors will start, at first with a rate of 2.5%.
• Continuing into 2027, the reduction of free allowances increases to 5%, and there will be a review of the CBAM functioning itself.
• By the end of 2027, an even more comprehensive review of CBAM will be conducted by the European Commission, evaluating progress in international climate negotiations and the impact on imports from developing countries.
• In 2028 and subsequent years, the phased implementation and reduction of free allowances for CBAM sectors will advance steadily until reaching 100% by 2034.

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The EU ETS and waste incineration after 2024

In the near future, waste incineration can become a part of the scope of the EU ETS:

• By the end of 2024, the mandatory monitoring, reporting, and verification of emissions from municipal waste incineration will be implemented.
• In the second half of 2026, the European Commission is set to release a report and propose legislation for potential inclusion of waste incineration facilities into the ETS by 2028.
• By 2028, emissions from municipal waste incineration and landfills will be under consideration for inclusion in the EU ETS.

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The EU ETS II in 2024 and after

In the upcoming years, the roll-in of the EU ETS II is projected to unfold as follows:

• From the beginning of 2024 to the end of 2027, the implementation of a cap on ETS2 will begin, with an initial linear reduction factor set at 5.1% annually for the ETS for buildings and road transport.
• By June 30, 2025, member states will be required to submit their final plans for spending their share of the Social Climate Fund under ETS2.
• From the beginning of 2025 to the end of 2026, auction-related monitoring, reporting, and verification for the ETS for buildings and road transport will commence.
• In the second half of 2027, the European Commission will conduct a review of the ETS2, evaluating its effectiveness, administration, and practical application, potentially leading to legislative proposals for adjustments.
• From 2028 to 2031, the initial linear reduction factor for the cap on the ETS for buildings and road transport will increase to 5.38% annually.
• By the end of 2029, the price ceiling for the ETS for road transport and buildings may be reconsidered for potential removal.

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