Shipping, heating and cars targeted in EU carbon market revamp

Free carbon permits will end for industries covered by theEU's planned carbon border levy, the draft said, a proposal manufacturing sectors are expected to resist.

The port of Genoa (Italy)

Brussels - The European Union wants tooverhaul its carbon market to cut planet-warming emissions faster and put a price on pollution from shipping, road transport and heating systems in buildings, a draft document seen by Reuters on Wednesday shows. The bloc's executive European Commission will next month propose the biggest revamp of its emissions trading system (ETS)since the policy launched in 2005. The ETS forces power plants, factories and airlines running European flights to buy CO2permits, creating a financial incentive to pollute less. The reforms are part of a package of EU policies Brusselswill propose on July 14 as it strives to meet the EU's target tocut net emissions by 55% by 2030, from 1990 levels. Most EUpolicies are designed to comply with an old climate target and need updating. A draft of the ETS proposal, first reported by Bloomberg News, said the supply of CO2 permits in the ETS will face aone-off reduction. The amount of permits entering the EU carbon market eachyear will also decrease at a faster rate, starting the year after the reforms apply, the draft said, without specifying howquickly the cap will fall.

The proposal would strengthen the ETS "market stabilityreserve", a mechanism designed to avoid a build-up of excesspermits that could depress EU carbon prices. The price of CO2 permits in the EU ETS has soaredto record highs this year and is currently trading at roughly 56euros per tonne. When the ETS contains more than 1.096 billion spare permits,the reserve would absorb 24% per year until 2030. When there are833 million to 1.096 billion permits in circulation, the reservewould absorb enough permits to bring that down to 833 million. The Commission declined to comment on the proposal, whichcould change before it is published. Member states and theEuropean Parliament must negotiate the final reforms, a process that could take roughly two years.

END TO FREE PERMITS
Free carbon permits will end for industries covered by theEU's planned carbon border levy, the draft said, a proposal manufacturing sectors are expected to resist. The EU's climate policy package will include a border tariff to force importers to pay for the CO2 emissions embedded ingoods such as steel and cement. Importers' fees per tonne of CO2would be linked to the EU carbon price to try to put European firms on a level footing with companies abroad. Other industries would also get fewer free permits, underproposals to strengthen the benchmarks that calculate eachsector's free permits, while firms must prove they are investingin cutting CO2 to receive them. The EU carbon market will expand to include shipping, which until now has not been covered. Emissions from maritime trips inside Europe and incoming voyages to the EU would both becovered, the draft said. It would also create a separate ETS for transport andheating systems in buildings. Those sectors would face CO2 costsfrom 2026. The Commission has said it will use revenues from the newETS to create a fund to support vulnerable households, if theirfuel bills increase as a result of the carbon pricing system.

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