The new law, already informally agreed with EU ministers, will accelerate the withdrawal of emission allowances available on the EU Emissions Trading System (ETS) “carbon market”, which covers around 40% of EU greenhouse gas emissions. It provides for:

an increase in the yearly reduction of emission allowances to be placed on the market (so-called “linear reduction factor”) by 2.2% from 2021, up from the 1.74% planned at present; this factor will also be kept under review with a view to increasing it further by 2024 at the earliest;

a doubling of the ETS Market Stability Reserve’s capacity to mop up excess emission allowances on the market: when triggered, it would absorb up to 24% of excess allowances in each auctioning year, for the first four years, thus increasing their price and adding to the incentive to reduce emissions.

Two funds to help foster innovation and spur the transition to a low-carbon economy

A modernisation fund will help to upgrade energy systems in lower-income EU member states. MEPs tightened up the financing rules so that the fund is not used for coal-fired projects, except for district heating in the poorest member states.

An innovation fund will provide financial support for renewable energy, carbon capture and storage and low-carbon innovation projects.

Protection against carbon leakage

The law also aims to prevent “carbon leakage”, i.e. the risk that companies might relocate their production outside Europe due to emission reduction policies. The sectors at the highest risk will receive their ETS allowances for free. Less exposed sectors will receive 30% for free.

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Julie Girling (ECR, UK), rapporteur, said: “The ETS remains the cornerstone of our EU policy to combat climate change. We have done our best to agree an ambitious update. The ETS has had many detractors over the years. We tackled many problems – from a carbon price that was clearly too low to make the market function to the extremely difficult issue of striking the balance between our environmental ambition and the protection of energy-intensive European industry.”

Next steps

The text was approved by 535 votes to 104, with 39 abstentions. It will now goes back to Council for formal adoption before publication in the EU Official Journal.