More allowances for decarbonisation? EC prepares ETS 1 changes

Brussels, 8 July (ČTK correspondent) - The European Commission is likely to propose making the ETS 1 emissions trading system for industrial companies more flexible. Under the proposal, companies could receive more free emissions allowances in exchange for investments in decarbonisation, an unnamed EU official said today. The European Commission is due to present its revision of the emissions allowance system next Friday, 17 July. Discussions are still under way on the final proposal to be approved by the Commission.

The EU emissions trading system operates on the principle that "the polluter pays". Power plants, industrial facilities and other businesses covered by the system must surrender one emissions allowance for every tonne of CO2 emitted. Member states sell most allowances through auctions, while some energy-intensive sectors still receive them free of charge to reduce the risk of production relocating outside the EU.

Auction revenues flow into the budgets of member states, which are intended to use them primarily for climate and energy measures, such as modernising the energy sector, supporting renewable sources or reducing emissions. According to the EU source, the European Commission will now also propose that a larger share of these funds be directed straight towards supporting the decarbonisation of European industry.

According to the EU source, the Commission wants the ETS 1 system to serve as a tool encouraging companies to invest in decarbonisation. This means it should no longer merely force companies to buy more expensive allowances, but should give them long-term certainty that investing in low-emission technologies will pay off. In this context, the revision is expected to bring more free allowances in exchange for investments, a slower tightening of the system, and the establishment of a so-called Industrial Decarbonisation Bank, a new European investment programme with a budget of 100 billion euros.

In this context, the Commission wants to launch the first round of support for industrial decarbonisation projects as early as 2027. Companies will be able to submit their projects, for example to convert a steelworks, and those that meet the conditions and apply earlier will receive support earlier. The system will operate until the allocated funding is exhausted.

The Modernisation Fund is also expected to continue and will be strengthened with additional emissions allowances intended to support less affluent member states. The Czech Republic is among the fund's largest recipients. Last week, for example, the EC announced that 2.5 billion euros (60.5 billion Kč) had been released from the fund, which is financed by revenues from the EU ETS emissions trading system, to support 51 energy projects in 11 EU member states. The Czech Republic received the third-largest amount at the time, specifically 516.8 million euros (12.5 billion Kč),

The Czech Republic is one of the countries calling loudly for changes to the ETS system. At the end of May, Czechia, together with other countries, called on the EU to protect their heavy industry from costs associated with carbon emissions. In this context, the countries mentioned, for example, the importance of maintaining the current level of free allocation of allowances enabling industrial companies to emit within the EU ETS system.

According to Czech Prime Minister Andrej Babiš, changing the emissions allowance system is the fastest way to help not only Czech but also European industry. Babiš said this during the June EU summit. European Commission (EC) President Ursula von der Leyen has previously said that the ETS system remains a "proven tool for supporting industrial transformation", but that it needs to be modernised and made more flexible.

According to a document seen by Reuters, the revision should extend the free allocation of emissions allowances to industrial companies in exchange for investment in the European Union.

At the beginning of April, the European Commission already presented the first change to the emissions trading system. It proposed adjusting the so-called Market Stability Reserve (MSR), which regulates the emissions allowance market. Under the new rules, allowances should not be cancelled if more than 400 million are held in the reserve. Instead, they will be retained as a reserve for the future. The aim is to increase stability and predictability.

According to ČTK sources as well, in the planned revision the Commission wants the emissions trading system to provide greater incentives for investment and innovation, and for those who pay for allowances to get their money back. The European Commission apparently plans to make more allowances available free of charge, but wants to make this conditional on companies' decarbonisation plans. Industry Minister Karel Havlíček recently said during a visit to Brussels that this approach would also be acceptable to the Czech Republic.

The ETS 1 system is Europe's main emissions allowance market. It covers energy generation, large industry and aviation in the EU. Following a one-year delay, the expanded ETS 2 system is due to become operational in 2028 and is expected to cover road transport and building heating. The introduction of ETS 2 is also expected to include a Social Climate Fund, which should mitigate the impact on low-income households.