World's largest carbon market faces revamp under draft EU plan

BRUSSELS (Reuters) - The world’s biggest carbon trading market faces a major overhaul under European Union climate change plans to cut greenhouse gas emissions faster this decade, a draft seen by Reuters shows.

FILE PHOTO: European Union flags flutter outside the European Commission headquarters in Brussels, Belgium August 21, 2020. REUTERS/Yves Herman

Under the EU emissions trading system (ETS) factories and power plants have to buy pollution permits to cover the greenhouse gases they emit, while airlines must do so for flights within Europe.

The draft document, which confirms that the European Commission will next week propose that the EU sets a target to cut emissions from 1990 levels by “at least 55%” by 2030, lays out options it is considering to deliver the new goal.

The Commission said it did not comment on leaked documents.

The existing target of a 40% cut by 2030 will not be enough for the EU to meet its goal of net zero emissions by 2050.

The new target, which needs national goverment and European Parliament approval, could be met both by reducing production of greenhouse gases and removing them from the atmosphere.

It would also require a tighter cap on the amount of permits in the carbon market, and the rate at which this cap drops each year would need to go beyond the planned rate of 2.2%, the draft said.

The Commission, which will propose a law containing the ETS reforms by June 2021, will assess what this means for the amount of free permits given to industry, a system designed to avoid companies relocating outside Europe to avoid carbon costs.

An initial analysis found a “significant amount” of free permits would still be available under a tighter cap, the draft said.

The Commission will also propose reducing free permits for airlines, while changes to fossil fuel taxes could also help cut emissions, which could make jet fuel more expensive.

The draft confirms plans to expand the ETS into new sectors, including “at least intra-EU maritime transport”, and possibly road transport and buildings.

However, it said the ETS should not replace existing emissions-cutting policies - such as the bloc’s emissions limits for cars, which would be made more ambitious.

Reporting by Kate Abnett; Additional reporting by Tom Sims; Editing by Alexander Smith