EU gives heavy industry more time under ETS overhaul whilst doubling down on electrification
The EU has announced a significant overhaul of its emissions trading system, giving heavy emitters more time to decarbonise whilst simultaneously ramping up its ambitions for electrification
In ancient Roman mythology, Janus is the god of transitions, looking simultaneously towards the past and the future. Investors following the EU’s energy policies may be forgiven for being reminded of deity as the EU rolled out two seemingly contrasting policy measures on the same Friday.
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In its much-anticipated overhaul of the Emissions Trading System (ETS), one of the most important carbon markets globally, the EU has effectively extended flexibility for heavy emitters in a bid to reduce costs for industries with significant carbon footprints.
While the ETS rules, first introduced in 2005, aim to gradually increase the cost of emitting carbon over time, the new changes are expected to slow the pace at which the carbon market tightens, potentially putting downward pressure on carbon prices in the short term. At the same time, the bloc aims to incentivise decarbonisation through a combination of more moderate carbon prices and additional public funding.
The moves have been criticised by the non-profit WWF which warned: "Like a Jenga tower, the ETS is only as stable as the building blocks that hold it together. Weakening too many of these blocks risks bringing the whole structure down, sending the wrong signal to businesses, investors and industrial frontrunners already investing in decarbonisation."
Meanwhile, the EU also announced that the Industrial Decarbonisation Bank will mobilise €100bn in funding to support industrial decarbonisation across Europe at scale, while more pressure will be put on member states to direct ETS revenues towards electrification and clean technology projects.
Simultaneously, the EU also announced details of its Electrification Action Plan, aiming to make Europe “the first electro-powered continent.” To reach this target, the EU plans to lower the upfront costs of electrification technologies across key demand sectors while accelerating grid deployment.
Ahead of these changes, a group of 56 investors representing €13.6trn in assets called on the EU to support a robust and predictable EU Emissions Trading System (ETS), amid growing concerns that the carbon market’s long-term integrity and policy certainty could be weakened.
The investors, which include Allianz SE, L&G and Nordea, called among others for stronger and more effective use of ETS revenues to support industrial decarbonisation, an appeal which appears to have been headed.
But by softening the near-term carbon price signal for heavy emitters while accelerating its plans for electrification, the EU risks sending mixed signals to investors over which mechanism will ultimately drive the transition: carbon pricing or industrial policy.
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