Environment ministers weaken Emissions Trading System in a race to the bottom with European Parliament

Rather than correct course after the European Parliament’s shocking abrogation of responsibility, EU environment ministers have lowered the ambition of the EU ETS even further. Moreover, the Environment Council has offered heavy industry billions in generous freebies while leaving households to pay the bill.

European Commission Vice President Frans Timmermans and France’s Minister for the Ecological Transition Agnès Pannier-Runacher. Image: European Union

Last week, MEPs voted on a diluted Emissions Trading System, undermining the European Parliament’s own position in favour of higher climate targets. Given that the ETS is a central plank of the EU’s climate policy, CMW and the green movement urged the Environment Council to take up the slack and raise ambition.

After hours of heated debate and horsetrading on Tuesday (28 June 2022), EU environment ministers followed the example of MEPs and, too, abrogated their climate responsibilities, choosing short-term gains that will cause Europe long-term pain.

“We were left to hope against the odds that the Environment Council might make up for the ground lost by the European Parliament,” said CMW Executive Director Sabine Frank. “Sadly, the deal struck today will fuel dangerous global heating well above the threshold of 1.5°C set by the Paris Agreement and will leave households to pick up the tab, while industry gets off the hook for free once more.”

Cap and burn

In order for the EU ETS to function effectively as a climate tool, the cap on emissions must be reduced significantly to both soak up the oversupply of pollution permits on the market and to ensure that emissions fall rapidly. While civil society groups have demanded the EU ETS deliver an overall reduction of emissions of over 70% by 2030, environment ministers decided to revive the European Commission’s original proposal of implementing a cut of just 61%.

This under-ambition stands in stark contrast with environmental and economic reality. Tightening fossil fuel energy supplies require the European Union to work on an emergency renewable energy deployment and energy saving plan because, in the words of Commission President Ursula von der Leyen, the era of “cheap fossil fuels” is over. Despite this, the EU institutions are paving the way for continued over-pollution by heavy industry for years to come.

“Instead of using the EU ETS to propel European industry towards deep decarbonisation at a time of a climate emergency and a fossil fuel crunch, environment ministers have settled for more of the same,” said CMW Policy Director Sam Van den plas. “But the recipes of the past are recipes for disaster.”

Industrial gravy train

Last week, MEPs agreed to hand heavy industry nearly 5 billion free allowances (equivalent to some 5 billion tonnes of emissions). The Environment Council was even more generous, adding extra handouts to the steel sector, and pushing the envelope comfortably beyond what the European Parliament already offered.

“It’s scandalous that member states should be in favour of showering industry with free pollution subsidies without asking anything in return,” observes Agnese Ruggiero, CMW’s policy officer for industrial decarbonisation. “The ETS is and remains a climate policy, not a cash cow. This revision is supposed to strengthen this tool, not to render it even more toothless.”

To make matters worse, environment ministers not only agreed to introduce the new Carbon Border Adjustment Mechanism, which imposes a carbon levy on imported products, even more slowly than the Commission’s original proposal, the sectors covered by the CBAM will continue to receive the majority of their pollution permits for free. This amounts to a double subsidy for polluting industries, paying the polluter instead of making the polluter pay.

Out in the cold

In its original Fit for 55 package, the European Commission had proposed to extend the EU ETS to buildings and road transport (known as ETS2). Last week, the European Parliament voted to temporarily exempt households from this expanded system, limiting it only to commercial use. The Environment Council revived the Commission’s original conception of applying ETS2 to households too.

However, the Environment Council stripped away many of the social protections voted on by MEPs. The deal reached by environment ministers on the Social Climate Fund (SCF), which was conceived to shelter vulnerable households from the effects of widened carbon pricing and to ensure they are not left behind during the green transition, is not fit for purpose.

While the Environment Council agreed with the European Parliament to keep the Commission’s proposal for allocating only a quarter of the revenue generated by ETS2 to the SCF, environment ministers parted with MEPs when they agreed to cap the SCF at €59 billion by 2032 and to ignore the parliament’s proposal to allocate more funds to the SCF if carbon prices rise above a certain level.

“Watering down the Social Climate Fund in this way will plunge poorer households into energy poverty and will widen social inequalities during the green transition,” pointed out CMW’s Elisa Martellucci.

Crash landing for aviation and shipping

By reverting to the original Commission proposals on aviation and shipping, the Environment Council shot down the European Parliament’s higher ambition in these sectors.

Environment ministers agreed to maintain the current scope of the ETS for aviation, which includes only flights within the European Economic Area, whereas the parliament had agreed to also apply it to all flights leaving the EEA. Moreover, the Environment Council has failed to address non-CO2 emissions and their effects.

“Member states have brought ambition crashing down compared with the European Parliament’s position,” said Daniele Rao, CMW’s policy officer for aviation. “The ministers failed to strengthen carbon pricing for the aviation sector and, instead, prioritised the risky and ineffective implementation of CORSIA over the expansion of EU ETS to cover flights between Europe and other parts of the world.”

Environment ministers agreed to phase in shipping until 2026, wasting another four years before this sector finally pays for its pollution, and are wrongly waiting till 2026 before medium-sized ships might be considered for inclusion in the scheme. Member states also do not want to reinvest carbon pricing revenue from shipping back into the sector itself or take responsibility for all the shipping emissions related to the EU’s consumption addiction. Furthermore, member states are caving in to vested interests to add a whole raft of exemptions for ships and trips that do not need so-called carbon leakage protection or handouts, covering small islands, outermost regions, Cyprus, Malta and ice-class vessels.

“The Environment Council has squandered the chance to put the sensible inclusion of shipping into the EU ETS on the table for trilogue negotiations with the Commission and Parliament,” says Wijnand Stoefs, CMW’s policy officer for shipping. “The European Parliament position on ETS is very problematic, but at least when it comes to shipping, it is miles ahead of the unambitious and time-wasting Council general approach.”

What happens next?

Now that the European Parliament and the Environment Council have set out their positions on the EU ETS, a three-way dialogue between the EU institutions, known as a trialogue, will be the next step in this legislative process. During the trialogue, the three institutions will endeavour to build consensus and hammer out a final deal that is acceptable to all parties.