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European Parliament vote adopts proposal for EU ETS reforms

On 22 June 2022, the European Parliament voted (on the second attempt) to adopt the proposed revision of the EU Emissions Trading System ("EU ETS") with amendments, as part of a vote which saw the adoption of three key legislative proposals under the EU's Fit for 55 package. 

The agreed proposal covers the following key areas:

  • a reduced overall emissions cap and more ambitious rate of greenhouse gas ("GHG") emissions reductions;
  • revised rules for free allocation of allowances and the market stability reserve;
  • extension of the EU ETS to emissions from maritime transport;
  • a new, separate ETS for buildings and road transport; and
  • increase to the Innovation and Modernisation Funds and new rules on use of ETS revenues.

Whilst there is much to digest in the wide-ranging proposal that was voted through, the most impactful from the perspective of our clients and their industries is the expansion of the EU ETS to cover maritime transport and new restrictions to curb speculative EUA trading by non-regulated entities: 

  • Maritime transport: The proposal to include shipping emissions has been long-stated and was expected to be adopted. However, there were a number of last minute changes to the proposal since the first vote, which included the following:
    • a replacement of the European Commission's "phase-in" approach from 2023-2025, to a requirement for full compliance from 2024 onwards;
    • tighter requirements on voyages between EU ports and non-EU ports to prevent carbon leakage; and
    • a reduction in the weight threshold for in-scope ships from >5,000 gross tonnage to >400 gross tonnage.
  •  Speculative trading: Participation in EUA trading will be restricted to entities regulated under the EU ETS (i.e. installations/operators whose emissions are caught by the EU ETS) or financial intermediaries acting on behalf of any such regulated entities. This move comes amid sustained pressure from factions within the European Parliament that speculative trading has led to an increase in the price of EU ETS allowances, and will remain a key topic of debate between the Parliament, Commission and Council as the trilogue legislative procedure commences. 

The agreed proposal will now go to the European Council for approval, where it may be adopted as legislation or sent back to the European Parliament for further amendments. 

To incentivise industries to further reduce their emissions and invest in low-carbon technologies, the Emissions Trading System should be reformed and its scope enlarged, say MEPs