The European Council formally approved an update to the European Union’s Emissions Trading System (ETS) on Tuesday as the bloc seeks to cut greenhouse gas emissions.
Under the EU’s 2030 climate and energy framework and the Paris Agreement, the bloc has pledged to reduce greenhouse gas emissions by 40% by 2030.
“The revised ETS directive is a significant step” towards achieving those goals, according to a statement from the European Council.
The European Parliament voted in favour of the update earlier this month. Although the new rules had been informally agreed with European ministers, the Council’s formal approval was the final hurdle for the ‘long-awaited’ reforms. The new rules will take effect in 2021 and extend through 2030.
The ETS is a crucial component of EU policy to curb climate change. The Council says the system is “the EU’s key tool for reducing greenhouse gas emissions cost-effectively.” The ETS covers around 40% of EU greenhouse gas emissions.
The revisions broadly reduce the number of permits available on the ETS to improve its efficiency and effectiveness. At the same time, the new regulations seek to avoid driving companies overseas where rules governing carbon emissions may be more relaxed, a phenomenon known as ‘carbon leakage.’
According to the Council, the ETS “sets a cap on how much CO2 heavy industry and power stations can emit.” Companies receive emissions allowances in the form of permits, which can then be traded.
Under the revisions, the cap on the total volume of emissions will be reduced by 2.2% each year. The rate at which allowances are moved to the market stability reserve will be doubled until the end of 2023, which is expected to raise prices.
After more than two years of discussion among EU member states, policymakers and political groups, the changes to the emissions trading system were agreed in November.
In a statement regarding the Council’s approval, Bulgarian environment minister Neno Dimov said, “Reducing greenhouse gas emissions will not only contribute to the fight against climate change but it will also positively impact the improvement of the air quality.”
“Protecting the environment and the health of European citizens is one of the priorities of the Bulgarian Presidency,” Dimov added. Bulgaria began its first six-month rotating presidency of the EU in January.
Air quality is a growing concern in the EU. Last month, EU Environment Commissioner Karmenu Vella warned nine EU member states they could face legal action over air quality issues if they do not take swift measures to improve the situation.
Fewer permits and rising carbon prices are expected to raise the prices of fossil fuel based energy sources. In effect, this could encourage the adoption of alternative fuels and technologies, including natural gas and renewables, such as solar and wind.
“As the price of allowances is expected to rise, carbon-reducing investments will become more cost-effective, speeding up decarbonisation of the EU economy,” Julia Michalak, director for EU policy at the International Emissions Trading Association, told Bloomberg.
Since the beginning of 2018, European carbon prices have increased nearly 20%.