After more than 30 hours of intense discussions, European Parliament and EU Council negotiators reached an overnight agreement to raise targets and expand the scope of the carbon market, according to an EP press release.

The EU will gradually eliminate free emission quotas

Currently, in order to cover their CO2 emissions, electricity producers and large energy-consuming industries (steel, cement) in the EU must buy “pollution permits” under the European Emissions Trading Scheme (ETS) , established in 2005 and applicable to 40% of the continent’s emissions. The total quotas created by countries have been reduced over time to get these big producers to pollute less.

The reform proposed in July 2021 by the European Commission aims to strengthen this objective in order to meet the desired limitation of greenhouse gas emissions, in accordance with the EU Green Deal. Under the deal, the proposed rate of reduction will accelerate to a 62% reduction by 2030 compared to 2005 (from a previous target of 43%), meaning that large industrial companies will be required to reduce their emissions by 62%.

In exchange for introducing a “carbon tax” at the border, the EU will phase out the free emission allowances it has so far distributed to European industrialists to allow them to compete with third countries. At least 48.5% of these free “pollution allowances” will be phased out by 2030 and disappear completely by 2034, a timetable that has been the subject of heated controversy between the European Parliament and the EU Council.

The EU will propose the creation of a second carbon market

Another controversial point of the reform is that the EU executive will propose the creation of a second carbon market (ETS2) for home heating and road fuels. Concerned about the social impact of such an additional cost, MEPs called for the measure to initially apply to office buildings and heavy trucks.

Finally, it was decided that households will pay a price for carbon emissions from using car fuels and gas heating from 2027, but this price will be capped until 2030. If the sharp rise in prices for continuous energy, implementation will be delayed by one year.

Revenue from the new carbon market will go into an €86.7 billion “Social Climate Fund” created to help vulnerable households and businesses in the energy transition.

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