Carbon Market Overhaul

Representatives in the European Parliament’s environment committee recently attained an initial consensus on reforming the EU’s carbon market. The legislators are aiming to overhaul the core policy for reducing global carbon emissions for the bloc of 27-countries.  This would be the biggest revamp since its launch in 2005.  The proposals methodically target each nation based on their gross domestic product (GDP).  As a result, stricter and more ambitious targets are set for wealthier member states compared to poorer ones.

Under the current legislation introduced in 2005, power plants and factories are mandated to buy CO2 permits when they pollute, a policy that has seen emissions fall by 43% since its introduction.  However, under the proposed legislation, lawmakers will cut the supply of carbon permits by 4.2%, to ensure emissions fall faster.  Additionally, the committee agreed to a bonus-malus system which would reward organisations with the best environmental performance by giving them additional permits, taken from firms with the worst environmental performance.  A majority of legislators also backed changes which would allow countries that overachieve on their targets to sell their additional CO2 cuts, or about 5% of their annual emissions limit, to another member state each year until 2030.

The committee also voted to curtail plans to launch a second emissions trading system (ETS) to impose CO2 costs on suppliers of fuels used in buildings and transport.  The reform of the ETS, is aimed at aligning the cap-and-trade system with a new climate goal of cutting emissions by at least 55% by 2030.  Instead, the committee agreed to apply the scheme to commercial institutions from 2025, and only expand it to private consumers in 2029 if certain conditions are met.  However, the package was rejected by the Members of European Parliament (MEPs).  According to Politico the cause of tension amongst MEPs is the level of “ambition”, regarding the amount of greenhouse gas emissions the reforms would reduce.

In the UK the government published its plan to reduce carbon emissions in its Industrial Decarbonisation Strategy report.   A major aspect of the new strategy is centred on transforming industrial processes.  A number of measures are proposed in this respect, from supporting innovation and the widespread deployment of low carbon technologies, as well as a stronger emphasis on more sustainable practices like remanufacturing to reduce the need for new raw materials.  In addition to this, greater adoption of digital technologies by industry is expected, with artificial intelligence, 3D printing and ‘digital twin’ technologies, all identified as having a role to play in reducing emissions. Furthermore, one of the levers the government has said it will pull to achieve industrial decarbonisation is its international trade policy. The government said it would work through forums such as the G7, G20, Office for Economic Cooperation and Development (OECD) and United Nations Environment Programme (UNEP), to “create a coalition of countries committed to shared approaches to developing the market for low carbon products”.

Further information on carbon disclosure for UK firms can be found within the Regulation summaries:  Carbon Disclosure Project (CDP), Taskforce on Climate-related Financial Disclosures (TCFD), EU Sustainable Finance Disclosure Regulation (SFDR)