European Chemicals & Ingredients: EU ETS Back on the Agenda: Expectations Ahead of 17 July Reform

Research evidence excerpt

European Chemicals & Ingredients: EU ETS Back on the Agenda: Expectations Ahead of 17 July Reform

Barclays | European Chemicals & Ingredients

Reminder: What is the EU ETS? The EU Emissions Trading System (EU ETS) is Europe's carbon

market, requiring companies to surrender one carbon allowance (EUA) for every tonne of CO₂

they emit. Industrial producers receive some allowances for free based on efficiency

benchmarks, while any shortfall must be purchased in the market. As allowance supply declines

and free allocations are phased out over time, carbon costs become an increasingly important

factor in the competitiveness of energy-intensive European industries.

FIGURE 1. The EU Emissions Trading System (ETS) is a cap-and-trade scheme that puts a price on

carbon by requiring companies to hold and purchase CO₂ allowances for their emissions under a

declining overall cap, incentivising emissions reductions over time

Source: Barclays Research

Key points to note on 17 July

1) Slower decline in the emissions cap: The current ETS trajectory implies the emissions cap

effectively reaches zero by 2039. One option under discussion is a less aggressive decline path,

leaving more allowances available in the 2040s, which the Commission has repeatedly

indicated since mid-May. This would require a lower linear reduction factor (LRF), which

determines the annual rate at which the emissions cap declines.

2) Extension of free allocations: The current rules phase out free allowances by 2034;

however, policymakers may chose to slow the phase-out or extend free allocation beyond 2034.

This has already received some criticism with the CME (Carbon Management Europe) arguing

this update would disadvantage companies that have invested billions of euros in

decarbonisation.