Government advisers: Emissions trading system reform should strengthen it, not weaken it

The European Commission is expected to present a proposal to reform the European Union Emissions Trading System (EU ETS) in the middle of this month. This is one of the most important economic decisions of the decade, according to leading German and European economic advisers. They say that weakening the system could have negative implications for climate targets and would also increase risks for industry.

The European Union is currently preparing adjustments to its climate policy for the period after 2030. The goal is to achieve carbon neutrality by 2050. The EU ETS is a key tool in this effort, requiring emitters to pay for every tonne of carbon dioxide they release.

According to the advisers, who include the chair of the German government’s expert commission on energy, the head of the European Scientific Advisory Board on Climate Change and a member of the scientific advisory board of Germany’s Ministry for Economic Affairs, weakening the system in response to current geopolitical pressures would put the future of European industry at risk.

Europe is currently home to around a quarter of the world’s industrial decarbonisation projects, according to experts. The figure is as high as half for steel and more than 70 percent for cement. Most of these projects, however, are still awaiting a final investment decision. A large share of them are located in Germany or involveGerman companies, according to Clean Energy Wire. They say that a stable carbon market can provide the certainty needed for long-term investment.

The economists therefore propose four key priorities for the upcoming EU ETS reform:

• Better protection for companies to prevent European businesses from relocating to countries with less stringent environmental rules.
• Strategic use of free allowances as an incentive to invest in new technologies.
• Greater flexibility through the use of modern technologies to remove carbon from the atmosphere.
• Effective use of revenue from allowance sales to support citizens and transform industry.

The market works better than subsidies

Experts warn against scrapping targets or postponing the planned launch of the emissions trading system for heating and transport (ETS2). They say the answer is not to introduce even more small-scale regulations, bans or permanent subsidies. Instead, a market-based system for pricing carbon emissions is the best and most effective tool for modernising the economy.

The European Commission will present its detailed legislative proposal for reform in mid-July. This will launch a challenging negotiation process that could last more than a year, according to the website.