The European Commission Review of the EU ETS for Phase IV

The European Commission (EC) has recently unveiled its proposal for the revision of the EU emissions trading system (EU ETS) with the aim of achieving a 40% reduction in emissions by 2030. Redshaw Advisors has summarized the key points of the proposal, emphasizing the potential cost implications for companies subject to the EU ETS.

Some of the key highlights include:

Average Phase IV prices are projected to reach as high as EUR 25.40, and approximately 6.3 billion allowances will be distributed for free over Phase IV, estimated to be worth up to EUR 160 billion.

Free allocations will be reduced, with Phase 4 divided into two five-year periods to allow for flexibility in adjusting allocation and benchmarking figures based on technological advancements and production levels.

Provisions will be made to accommodate production decreases or increases, with the New Entrant Reserve absorbing excess allocations from production decreases and providing additional allocations for production increases.

Carbon leakage sectors will face stricter regulations, with only 50 high-risk sectors eligible for 100% free allocation, while the remaining sectors will receive only 30% of their benchmark for free. This will result in higher costs for many sectors in Phase IV.

Benchmarking values will be revised in 2021 and 2025 to reflect technological advancements, and a 1% annual decrease will be applied to all sectors to ensure emission reduction contributions.

Unallocated allowances from Phase III will go into the Market Stability Reserve (MSR), except for 50 million tonnes reserved for an innovation fund. This withdrawal will likely cause prices to rise by an additional €2.00 by 2020.

The proposal also includes member states determining their own policies for compensating indirect carbon costs, allowing flexibility in the use of auction revenues, the full bankability of EU Allowances from Phase III to Phase IV, and the continuation of opt-out rules for small emitters.

To assess and mitigate the impact of these changes on your company’s financial bottom line, Redshaw Advisors encourages businesses to reach out for personalized guidance and assistance.

Overall, the proposed revision aims to drive investments in clean energy and emphasizes the importance of transitioning towards sustainable practices.

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