12 Dec 2022

Are we about to see a big bonus for Europe’s low-carbon ETS producers?

Milan Elkerbout

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The EU’s legislators are in the final stages of deciding on updates to some of the most important EU climate policies –  the EU Emissions Trading System (ETS) and the new Carbon Border Adjustment Mechanism (CBAM). High energy prices have led to anxiety about Europe’s industrial future. More than ever, safeguarding industrial competitiveness is at forefront of policymakers’ minds. But equally, Europe’s industrial future must be climate neutral. However, the EU’s innovation funding framework is better suited for early-stage R&D and demonstration funding, than for scaling up the deployment and commercialisation of low-carbon technology.

By reforming the rules on ETS allocation, an-EU wide framework for sustained low-carbon technology financing could be within reach. Producers putting (almost) climate-neutral goods on the market should be given a bigger bonus in ETS allowances, so that the sale of excess allowances turns into a revenue stream for low-carbon technology deployment. Such an approach would not depend on uncertain application processes like with the Innovation Fund, would be available across all Member States, and for smaller industrial sectors and SMEs as well.

This CEPS Explainer provides some details on why such a reform of ETS allocation rules at a late stage in the legislative process is worthwhile. The key message is that we should see ETS allowances – worth hundreds of billions of euros – as an important foundation for an EU industrial policy and perhaps even as a response to the US Inflation Reduction Act. This requires shifting the justification for free allocation from carbon leakage protection to innovation and low-carbon competitiveness.