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World’s Biggest Carbon Market to Get Even Bigger in New EU Plan

Ewa Krukowska

(Bloomberg) -- The world’s largest carbon market is about to get even bigger and more ambitious in Europe’s latest plan to cut greenhouse gas emissions under its Green Deal.

The European Commission will consider expanding its Emissions Trading System in a bid to cut carbon emissions “at least 55%” from 1990 levels by 2030, according to a draft document seen by Bloomberg. The current target is a 40% cut.

If approved, the stricter climate target would be legally binding for the bloc’s 27 member states and would leave no sector of the economy untouched. Carmakers would be forced to drastically cut the emissions of their fleets and big industries would have to pay more for carbon pollution. Fossil fuel subsidies would be scrapped, possibly curbing investment in dirty fuels.

The planned expansion of the Emissions Trading System, which currently imposes pollution limits on around 12,000 industrial facilities owned by utilities and manufacturers, may include building and road transportation. The EU also plans to tighten the program’s emissions cap, apply more stringent pollution standards to airlines, and regulate emissions from the shipping industry for the first time.

“Increasing the EU’s 2030 climate ambition will also require a strengthened cap of the EU ETS to create the necessary long-term carbon price signal and drive further decarbonization,” the commission said in the document to be published on Sept. 16.

The new 2030 climate goal is set to include cutting greenhouse gases and removing them from the atmosphere, a design that may somewhat lower the burden on some industries.

The price of permits to pollute in the carbon market soared to near record highs earlier this year as Europe began enacting its Green Deal, a sweeping strategy to reach climate neutrality by 2050. The benchmark allowances for December traded at around 28 euros, a four-fold increase over the past three years.

The cap-and-trade program currently covers more than 40% of European emissions. The proposal would toughen the program’s so-called Linear Reduction Factor, which sets the pace at which the market’s pollution cap shrinks every year. According to the draft, the LRF would shrink at a faster rate than the current 2.2.%.

The draft also floats an option of combining such a move with a one-off reduction of the cap to put it closer to the actual emissions level.

“The Commission will further assess how to strengthen the cap in the context of an extension of the system and next year’s review of the functioning of the Market Stability Reserve,” it said in the draft. The MSR is an instrument that automatically controls the supply of carbon allowances, withholding extra permits from the market.

The EU will also study the impact of a tighter cap on the number of free allowances that some companies get to discourage them from relocating to regions with laxer climate policies. An analysis by the commission shows that “at first sight, a significant amount of free allocation would still be available.”

Europe’s environmental clean-up will not overlook aviation and shipping, the sectors where the region’s international emissions have grown more than 50% since 1990, according to the draft. The EU already imposes emission caps on flights within the region and now plans to propose reducing the number of free permits for airlines, effectively boosting the cost of compliance. It also wants to include “at least intra-EU maritime transport” in the ETS.

The Commission plans to propose a law on how exactly to revise the ETS in mid-2021.

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