Key EU committee approves ETS, CBAM carbon reforms

The European Parliament's Committee on Environment, Public Health and Food Safety (ENVI) voted Feb. 9 in favor of the EU's revised Emissions Trading System, which includes major carbon market reforms, pushing the bill closer to formal adoption.

The ENVI committee said in a tweet that 57 voted for the ETS reform while 13 voted against it, with six abstentions. Meanwhile, the EU's Carbon Border Adjustment Mechanism (CBAM) received 63 votes in favor and seven opposing the carbon tax.

European carbon prices observed sharp gains immediately after the approval by ENVI of these key reforms.

EU Allowances for December 2023 rose by more than Eur2/mtCO2e in morning trading Feb. 9. EUAs were trading at Eur91.66/mtCO2e at 1235 GMT, according to ICE. This was up from the previous day's price of Eur90.28/mtCO2e, as assessed by Platts, part of S&P Global Commodity Insights.

Under CBAM, which will initially come into effect in 2026, imports of steel, cement, fertilizers, aluminum and electricity will be subject to a carbon leakage or tax.

"By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU's climate objectives are not undermined," according to the European Commission.

Climate targets

On Feb. 8, the EU Committee of the Permanent Representatives also approved the ETS reform with 23 member states approving the key bill, according to Peter Liese, lead negotiator on the ETS in the European Parliament.

This comes more than a month after negotiators agreed to reform the EU's ETS on Dec. 18, increasing carbon cutting ambitions to 2030, detailing the removal of free allowances and confirming the inclusion of maritime shipping and a new ETS II for buildings and transport.

The headline agreement requires the ETS' 10,000 covered installations to reduce their carbon emissions by 62% on 2005 levels by 2030, one percentage point more than proposed by the European Commission and a 44% hike on the current target.

This means the EU ETS and CBAM reforms are just a few steps away from making the legislation binding, with a plenary vote expected in the second quarter of 2023.

A one-off reduction in EUAs of 90 million mtCO2e in 2024 and 27 million mtCO2e in 2026 would help Europe deliver on the target, in combination with an annual reduction in EUAs of 4.3% from 2024-27 and 4.4% from 2028-30, the same as previously agreed by the EU Council and European Parliament.

Analysts at S&P Global expect EUAs to receive upside support to long-term prices as we get closer to the conclusion of these negotiations.

"The sum of 2021-2030 EU ETS free allocations are set to fall by around 10%, led by a reduction of nearly 50% from sectors covered by the new CBAM by 2030," they added in a recent note.