Carbon Pricing for Net Zero/Utilizing Market Mechanism
EU ETS and CBAM
January 27, 2022

Andrei Marcu

Overview
1. Price trajectory of EU carbon price in the ETS

2. Who delivers emission reductions in the EU ETS?
3. Comparing the proposal of the Commission for the EU ETS revision withthe amendments of the ENVI Committee
4. Comparing the proposal of the Commission for CBAM with theamendments of the ENVI Committee

EU carbon price trajectory

Source: ICE futures EuropePower vs industry in the EU ETS
Index of verified emissions
110
100

Total
stationary90

Power80
70

Industrial
Heat60Industry502013

2014

2015

Source: BloombergNEF & ERCST

2016

2017

2018

2019

2020

Decarbonisation in the power sector
Drivers of emissions variations in the power sector in the EU (2005-2018)

Source: BloombergNEF & ERCSTENVI Draft
ReportCore elements

Amendment

EU ETS: Proposed Amendments in the ENVI Draft Report (1)444

Ambition

45--

Free Allocation-Option of transitional freeallocation for modernization ofenergy sector needs to be removed
Introduction of a bonus-malus
system & climate neutrality plans(sectoral roadmaps) instead ofconditionality on energy audits
Temporary CBAM reserve withrolling review mechanism

1213,51
15,53,54

Commission
Proposal--Comment

61% emission reduction
target for ETS sectors
4.2% LRF and one-offrebase- Max update rate ofbenchmarks to 2.5% as of2026, up from current 1.6%
- Conditionality on
implementation of
measures in energy audits- Free allocation for CBAMsectors phased out by 2035

The phase out of freeallocation should be
kept under review inlight of CBAM
effectiveness.

55

6Core elements

Market Stability
Reserve (MSR)

Use of the ETS
Revenues

ENVI Draft
ReportTo avoid CSCF, variable back-up ofshare of MSR allowances that would
otherwise be invalidated

Amendment

EU ETS: Proposed Amendments in the ENVI Draft Report

3058Commission
Proposal- 24% intake rate maintained
until 2030
- Buffer intake rate
- Allowances in MSR above
400 million will be canceled- TNAC calculations will
include aviation
100% ETS revenues must be
used for climate-related
purposesComment
To ensure predictability
and avoid
disincentivizing bestperformers, it is crucial
to avoid the CSCF7ENVI Draft
ReportCore elements

Modernisation
Fund (MF)

Innovation FundAmendment

EU ETS: Proposed Amendments in the ENVI Draft Report- Transfer 50% of the proposed MF
top-up to projects under theInnovation Fund.
- MSs may use transitional freeallowances (Art 10c) to support
investments within the frameworkof the MS- Should not support nuclear

46,
59

-

17-

Should not support nuclear
Should support agriculture,aviation and transport also.
At least 10% for railway systems
and local public transport

66
67

62
63

Commission
Proposal- Additional 2.5% of the cap is auctioned toincrease MF- MF cannot financeinvestments in any
type of FFCommentMSs should be allowed tokeep Article 10callowances for otherpurposes
Guarantee at least 280
mln allowances up to2030 for IF- 200 mln allowances
Special support to train sector
added, 150 from ETS 2 under the Innovation Fund
- Scope includes project
support via CCfDs

8Coreelements

ENVI Draft
ReportAmendment

EU ETS: Proposed Amendments in the ENVI Draft Report- If global measure at IMO level is adopted 8 and at least comparable to EU measures,
6
scope of ETS should be reduced, if not,ETS
scope should be extended to 100%
5 Extension to - Move forward date of full application to10,2025
Maritime- Include methane emissions, not only CO2 41- Establish an Ocean Fund-

New ETS forRoad
TransportandBuildings

Should cover all fuels to ensure levelplaying field
Applicable as of 2025 instead of 2026,
with opt-out clause until 2027 forprivate road transport and residentialbuilding heating

Commission
ProposalComment

All emissions from intra-EU, 50%
from extra-EU and at berth in EU
port
As of 2026, shipping companies
must surrender 100% of theiremissions

Moving forward
the date makes 57
mln allowances
available to beused to avoid
CSCF

19 - Cap will be set from 2026,
alongside LRF in line with 43%
emission reductions by 2030
- Includes price-based costcontainment mechanism- Separate MSR for both sectors
operational as of 2027
9

EU ETS: Proposed Amendments in the ENVI Draft Report
Other noteworthy proposed amendments- CCS&U further incentivised- Surrendering discount of allowances under LCA assessment- (From implemented to) Delegated act to specify when chemically bound- BECCS and DAC (free allocation)- Extra allowances when CO2 permanently removed- Inclusion municipal waste incineration- Different elements focus on avoiding the CSCF

10CBAM DesignElement

ENVI Draft
ReportAmendment

CBAM: Proposed Amendments in the ENVI Draft Report (1)Commission
ProposalScope: Covered
Products

Aluminium, cement,Aluminium, cement,electricity, fertilisers,
120 electricity, fertilisers, andhydrogen, iron and steel,iron and steelorganic chemicals, polymers

Scope: Covered
Emissions

Direct emissions plus
indirect emissions from
offsite electricity use

33
122
Direct emissions only124125

CommentInclusion of 2-digit
trade code CN29
(organic chemicals)
adds hundreds ofproducts to scope,increases admin.
burden and revenue
Indirect emissions
based on annual
average emissions
intensity of themarginal/price setting
generator

CBAM DesignElement

ENVI Draft
ReportScope: Trade Flows

Imports only, but
assessment and potential
adjustment in 2026

Timeline

Transitional phase:2023-2024
Free allocation phase-out:
2025-2028; Cement: 2025

Policy Crediting

Explicit foreign carbon
pricing only

Amendment

CBAM: Proposed Amendments in the ENVI Draft Report (2)Commission
Proposal

103
Imports only
104

Comment
Potential challenge
acknowledged, but
solution deferred

Accelerated phaseTransitional phase:out schedule for free
105 2023-2025
allocation
116 Free allocation phase-out:
significantly raises
2026-2035
the stakes
Recital (more)
7
Foreign carbon pricing
expressly rules out
47onlyconsideration of49
implicit carbon priceCBAM DesignElement

Revenue Use

ENVI Draft
ReportCBAM Revenue accrues to EU
budget, but commensurateincrease in support for trade
partners

Amendment

CBAM: Proposed Amendments in the ENVI Draft Report (3)26

ETS auctioning revenue evenly
107
split between innovation fund andEU budget

GovernanceCentralized administration by an
EU CBAM Authority

Commission
Proposal

No determination onrevenue use

Decentralized
51administration by 2753
Member States

Comment
Revenue to(indirectly) contributeto stronger focus oncooperation with EU
partners, notably
LDCs, on theirdecarbonization
Centralized approach
proposed for greater
coherence, efficiency
and transparency

www.ercst.org

Thank you14