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The European Union plans to overhaul its Emission Trading System to become climate-neutral by mid-century. The move is a part of a Green Deal between 27 EU nations and will enact sweeping changes to existing policy.
Bloomberg reported three key updates to the trading scheme – the largest since the EU carbon market was formed in 2005, pending the agreement’s formal endorsement.
Each year the Emission Trading System has a cap on how many new carbon allowances are available to the market. In 2024, the EU will cut 90 million carbon allowances followed by a further 27 million in 2026.
On top of the blanket cuts, the Linear Reduction Factor (the percentage by which the number of carbon allowances reduces annually) will also become more aggressive. To date, there has been a 2.2% drop. As of 2024 the cap will shrink by 4.3% each year, then to 4.4% from 2027.
Additionally, the scheme is being broadened in 2027 to cover heating, road transport and shipping.
By 2030 these measures should result in a 62% drop to the region’s carbon emissions from 2005 levels. In comparison, the Australian Climate Act which only came into effect during September has a 43% reduction target over the same period.
As well as being a positive shift for environmental goals, these changes stand to benefit investors. Built-in supply declines were already creating favorable conditions for those invested in carbon allowances as the price of carbon – by default – should have risen over the medium to longer-term.
These policy updates could have a flow on impact to carbon prices rise as supply sees two shocks, in 2024 and 2026, and demand intensifies as economies strive for energy independence and security.
“The deal is a success for the EU and will provide certainty to companies and investors even if some compromises had to be made as the economic environment is very challenging,” said Ingo Ramming, head of carbon markets for Banco Bilbao Vizcaya Argentaria SA in Madrid.
EU carbon prices hit record highs in August after suffering earlier in the year when the Russia-Ukraine War broke out and threatened energy security. The European Union took energy security and supply concerns into consideration during the 29-hour negotiations for the scheme overhaul.