The EU Emissions Trading System (ETS) has been a key climate policy tool since 2005, placing a cap and price on emissions from the energy, industry, maritime, and aviation sectors, which together account for about 40% of the EU’s emissions. By setting a market-based limit and allowing trading of emissions allowances, it incentivises industrial decarbonisation through the incremental increase of the cost of carbon emissions. The ETS also includes a Market Stability Reserve (MSR), operational since 2019, which adjusts the supply of allowances to stabilise the carbon market against major shocks.

This consultation sought stakeholder input to evaluate the implementation of the ETS Directive and MSR Decision, as required before any potential revisions. It covers ETS1 sectors (stationary installations, aviation, and maritime transport) and the functioning of the MSR since its inception, aiming to assess their effectiveness and identify improvements to ensure the ETS continues to support cost-efficient decarbonisation towards EU-wide carbon neutrality by 2050. Stakeholders were invited to provide views on both the past performance of the ETS and MSR and on potential future policy options.

Bellona’s recommendations:

• Prioritise the phasing out of free allowances allocation, as they have proven ineffective in incentivising industrial decarbonisation, weaken the carbon price signal for other sectors and are not compatible with the updated ETS cap
• Until the carbon cost will heavily impact electricity prices, Indirect Cost Compensation (ICC) should be limited to only covering the share of renewable electricity consumed and unjustly subjected to carbon cost
• Strategic use of ETS revenues
• Prioritise emissions reductions under the EU ETS and strictly limit Carbon Dioxide Removal (CDR) to ensure it complements – not replace – real decarbonisation, potentially interacting only gradually with the ETS under strong safeguards and robust Monitoring, Reporting and Verification

Read the full response below:

• Consultation Response (pdf)