The EU has brought in legislation to help its Member States live up to the commitments undertaken in the Paris Agreement to keep global warming below 2 degrees Celsius above pre-industrial levels. One of the main instruments devised by the EU is the Emissions Trading System (EU ETS), a key tool for cost-effectively reducing greenhouse gas emissions. The tool is aimed at heavy industry and relies on companies trading in emission allowances to ensure that emissions are cut where it costs least to do so while keeping within an overall EU-wide cap on emissions. The EPP Group has been leading the 4th reform of the ETS that will become operational in 2021. The reform fixes some of the teething problems of its previous versions mainly through the progressive annual reduction in the number of allowances and by putting in place a system in which companies cannot accumulate allowances in periods when demand and therefore their price drops.

Although the main source of greenhouse gas emissions is industry, other sectors also need to contribute to overall national targets. Agriculture is one of those, but so is transport, buildings and waste. For emission reductions in these sectors, the EPP Group has made sure Member States receive realistic targets based on their GDP.

Forestry on the other hand offsets those reductions since forests absorb and neutralise CO2. New EU rules ushered through by the EPP Group say that land must be managed in such a way that emissions generated from land use (for example pastures) are entirely compensated by an equivalent removal of CO₂ from the atmosphere through action in the sector (i.e. forest management).

The EPP Group believes building a climate-friendly, low-carbon society and economy is a big challenge, but also a huge opportunity. Some of the benefits Europeans will have from the transition to a low carbon economy are: new jobs and 'green' jobs, improved competitiveness, economic growth, cleaner air and more efficient public transport systems in cities, new technologies such as electric or plug-in hybrid cars, energy-efficient homes or offices with intelligent heating and cooling systems and secure supplies of energy and other resources.

Reducing greenhouse gas emissions not only contributes to the fight against climate change, but it also has a positive impact on the protection of the health of Europeans as it improves air quality. This has always been our priority.

The EPP Group was the driving force behind devising effective instruments to achieve the 2030 climate objectives while preserving the EU industry’s competitiveness and jobs. For us, it was also important to encourage the protection and growth of our forests and to take care of our agricultural lands.

The legislation

To achieve the Paris Agreement goals, the EU has committed itself to reducing greenhouse gas emissions by at least 40% by 2030. The law on ETS sets new reduced limits on CO2 emissions for heavy industry and power stations. By 2020, emissions from sectors covered by the system must be 21% lower than in 2005.

EU Member States have also set binding annual greenhouse gas emission targets for 2021-2030 for the sectors of the economy that fall outside the scope of the EU ETS. These sectors, including transport, buildings, agriculture, non-ETS industry and waste, account for almost 60 per cent of total domestic EU emissions.

The non-ETS sectors are regulated by the Effort Sharing Regulation (ESR) and the Regulation on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry (LULUCF).

Non-ETS sectors must reduce emissions by 30% by 2030 compared to 2005 as their contribution to the overall target. The ESR translates this commitment into binding annual greenhouse gas emission targets for each Member State for the period 2021–2030, based on the principles of fairness, cost-effectiveness and environmental integrity. The LULUCF Regulation lays down the accounting rules for land use and forestry emissions - in other words, how to count how much the sector emits and how much CO2 it absorbs.

The ETS and how it works

The reformed EU ETS entails the following specific elements:

  • First, the decision to cut greenhouse gas emissions by at least 40% by 2030 in order to avoid the worst consequences of climate change. This means that instead of reducing emissions by 38 million tons a year, which has been the case until now, as of 2021, they will be reduced by 50 million tons a year;
  • Second, new rules to protect industry against the risk of carbon leakage. Carbon leakage occurs when there is an increase in CO2 emissions in one country as a result of having less emissions released in a second country with a strict climate policy;
  • Third, in order to facilitate transition to a low-carbon, clean economy, a funding mechanism on innovation and modernisation has been established. More specifically, the Innovation Fund was created in order to extend the existing support for innovative and greener technologies to breakthrough innovation in industry. The Modernisation Fund on the other hand, is there to facilitate investment in modernising the power sectors, especially the one based on coal. It is also meant to improve energy efficiency in ten lower income Member States, coming from Eastern Europe mainly.

The new EU ETS works by putting a limit on how much CO2 heavy industry can emit. Companies receive a fixed annual number of emission allowances as permits that they can trade. This approach gives companies the flexibility they need to cut their emissions in the most cost-effective way.

The ETS applies to more than 11,000 industrial sites in Europe and is crucial to achieving a significant reduction in emissions.

Laws on Effort Sharing and Land Use

The ESR lays down binding greenhouse gas emission reduction targets for Member States for 2021-2030 for the transport, buildings, agriculture and waste sectors (sectors that are not covered by the EU ETS or LULUCF). These differentiated national emission reduction targets take account of the GDP per capita of each Member State. This ensures fairness because higher income Member States take on more ambitious targets than those with lower income. The resulting 2030 targets range from 0% to 40% compared to 2005 levels. In addition, the EPP Group has made sure that countries suffering from the economic crisis will be granted certain flexibility. The already-existing flexibilities are preserved to help Member States attain their annual limits. They will be able to bank, borrow and transfer annual emission allocations between countries from one year to another within the 2021-2030 period.

The main rule of the LULUCF Regulation is the so-called ‘no-debit’ rule that says that the amount of carbon absorbed in the LULUCF sector has to be at least equivalent to the amount emitted. Most importantly, the new law sets guidelines on how to calculate forestry into the zero-sum equation. It was important to the EPP Group that the new rules provide Member States with a framework to incentivise more climate-friendly land use, without imposing new restrictions or red tape on individual actors. This will help farmers to develop climate-smart agriculture practices and support foresters through greater visibility for the climate benefits of wood products, which can store carbon sequestered from the atmosphere.

The future looks bright

In order for Europe to successfully continue its fight against climate change, it needs to move further towards a low-carbon economy and not lose sight of the objectives set in the Paris Agreement. The EPP Group will also insist in the future on the need to engage actively in the fight against climate change while protecting European jobs and competitiveness.

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