European Union (EU) member states and parliamentarians have agreed on a major reform to the bloc’s carbon market or emission trading system (ETS) to reduce emissions and encourage investments in climate-friendly technologies.

The proposed reforms include emission cuts of 62% by 2030 from 2005 levels for the ETS sector which comprises polluting industries.

Further, the European Parliament said that the emission reduction would be achieved by phasing out free allowances to companies.

“There will be a one-off reduction to the EU-wide quantity of allowances of 90 million tons (Mt) Co2 equivalents in 2024 and 27 Mt in 2026,” a statement said.

It added that the Carbon Border Adjustment Mechanism (CBAM), which works to prevent carbon leakage, will be phased in at the same speed that the free allowances in the ETS will be phased out.

The CBAM will therefore start in 2026 and be fully phased in by 2034.

The ETS, which enshrines the “polluter pays” principle, is at the core of the European climate policy and key to achieving the objective of climate neutrality.

The EU Parliament and Council are yet to formally approve the agreement before the new law can come into force.

“This deal will provide a huge contribution towards fighting climate change at low costs. It will give breathing space for citizens and industry in difficult times and provide a clear signal to European industry that it pays off to invest in green technologies,” said Peter Liese, main rapporteur of the European Parliament and environmental spokesman of EPP, Christian Democrats.

New ETS for transport and buildings by 2027

A separate new ETS II for fuel for road transport and buildings, which will put a price on emissions from these sectors, will be established between 2027 and 2028, depending on energy prices.

A new price stability mechanism would be set up to ensure that if the price of an allowance in ETS II rises above €45 ($47.7), additional 20 million allowances will be released.

The proposal said that investments will be made available for innovative technologies and to modernize the energy system.

The Innovation Fund will be increased from the current 450 to 575 million allowances. The Modernisation Fund will be increased by auctioning an additional 2.5% of allowances that will support EU countries with GDP per capita below 75% of the EU average.

All national revenues from auctioning ETS allowances will be spent on climate-related activities.

The ETS will also, for the first time, be extended to maritime transport.

Further, the proposal said that nearly 24% of all ETS allowances will be placed in the market stability reserve to address possible imbalances between the supply and demand of allowances in the market due to external shocks such as those caused by the Covid pandemic.

Additionally, EU countries must measure and report emissions from municipal waste incineration installations from 2024.

The Commission recently approved a €220 million (~$215.3 million) to support Cobra Facilities & Services in Spain in the production of renewable hydrogen.

In September, the commission approved the second phase of the Important Project of Common European Interest to support research, innovation, and the first industrial deployment of the hydrogen technology value chain in Europe.