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Strengthening the EU ETS: reduction of the ‘cap’ and extension of scope

The proposal of the European Commission increases the scope and range of the EU ETS by reducing the overall quantity of allowances (cap) and by expanding the scope to new sectors. The maritime transport sector would be fully included in the existing EU ETS and a new separate Emissions Trading Scheme would be introduced for the buildings and road transport sectors. The European Commission is also proposing to phase out free EU ETS emission allowances for aviation.

The envisaged extension of the ETS to maritime transport would build on existing monitoring, reporting and verification (MRV) mechanisms. The new EU ETS for road transport and buildings would apply upstream, building on existing provisions regulating tax warehouses or fuel suppliers.

What does this mean for your business?

If adopted, the proposed changes may have significant financial impact on the sectors (to be) included in the EU ETS. By design, therefore, the incentives for investing in carbon efficient alternatives may be shifted. Assessing this impact and contemplating structural shifts are important steps in preparation for the potential implementation of the rules. The starting point of such exercise can be an inventorisation of the carbon footprint of your current business operations, of (technical) possibilities available to reduce the footprint and the effects of and consequences for your supply and value chain. A next step can be to simulate application of the new taxes and levies to your ‘as is’ situation as well as to calculate the abatement costs to come to a new situation taking into account incentives and subsidies available.

The proposal states that from 1 January 2027, the new taxable subjects in the sectors road transport and buildings (‘regulated entities’, distributors of energy products) have to surrender a number of emission allowances to be acquired that is equal to the total emissions, corresponding to the quantity of fuels released for consumption (road transport and buildings) the preceding calendar year. This proposal regards a EU wide mechanism, for two domestic sectors in each of the separate EU Member States. 

Shipping companies within the scope of the new EU ETS shall be liable to surrender allowances according to the following schedule: (a) 20 per cent of verified emissions reported for 2023; (b) 45 per cent of verified emissions reported for 2024; (c) 70 per cent of verified emissions reported for 2025; (d) 100 per cent of verified emissions reported for 2026 and each year thereafter. 

With respect to the obligations under the new ETS, the Dutch administering maritime authority will be relevant for shipping companies registered in the Netherlands, and for non-EU shipping companies where the Netherlands would be the EU-country with the greatest estimated number of port calls from voyages performed by that shipping company in a certain period. 

The specialists at PwC can help you assess the implications for your organisation.


Europe has raised its climate ambitions and set a target of 55 per cent net emissions reductions by 2030. The proposed changes in the EU ETS, increasing its sectoral scope and accelerating the cap reduction, are meant to reflect this ambitious goal.

Buildings and road transport

The creation of a separate self-standing emissions trading scheme for buildings and road transport would represent a significant expansion of the sectoral scope of the EU carbon pricing system (EU ETS). According to the proposal presented, the relevant 'regulated entities' will have to obtain greenhouse gas emission permits in 2025 and already will have to report their emissions for 2024 and 2025. The obligation to surrender allowances (and other compliance obligations) will only apply from 2026 onwards. Crucially, allowances would be auctioned without any free allocation.

Considering the large number of emitters, the taxable subject designated for surrendering the required allowances is selected upstream the supply chain. The ‘regulated entity’, therefore, is not the actual emitter but the entity responsible for the release for consumption of fuels which are used for combustion in the sectors of buildings and road transport. There are exceptions provided such as the release for consumption of fuels for which the emission factor is zero. The regulated entities are defined in line with the EU system of excise duty. 

The proposal is mentioning that from 1 January 2027, EU Member States shall ensure that, by 30 April each year, the regulated entity surrenders a number of allowances that is equal to the total emissions, corresponding to the quantity of fuels released for consumption pursuant during the preceding calendar year and that those allowances are subsequently cancelled.

For the sector road transport, the proposed revision of the regulation setting CO2 standards for new cars and vans accompanies this proposal, as zero emission cars, or strongly decarbonised road vehicles will not or less be inflicted by the new EU ETS for the road transport sector.

Maritime transport

Under the proposal, the maritime transport sector would be gradually included in the current EU ETS through a transitional period starting as soon as 2023, achieving full inclusion in 2026. Shipping companies would start with an obligation to surrender allowances for only a part of their verified emissions, gradually increasing to an obligation to surrender allowances for 100 per cent of their verified emissions in 3 years. In terms of scope, the extension of the EU ETS to maritime transport would apply to half of the emissions from extra-EU voyages, to the emissions of intra-EU transport and to the emissions generated during docking at an EU port.

Cap reduction

In addition to expanding the scope to new sectors, the proposal also increments the reduction targets of the existing system. 

The linear reduction factor is increased to 4,2 per cent from the year following the entry into force of this Directive amending the ETS Directive. The increased linear reduction factor is combined with a one-off downward adjustment of the cap so the new linear reduction factor has the same effect as if it would have applied from 2021.

The overall quantity of allowances ('cap') will therefore decline at an increased annual pace resulting in an overall emission reduction of sectors under the EU ETS of 61 per cent by 2030 compared to 2005. 

In addition, from the year following entry into force of this Directive, the cap is to be increased by an amount of allowances corresponding to the maritime transport emissions to be included in the EU ETS.

Proposal for amending Decision (EU) 2015/1814 as regards the amount of allowances to be placed in the Market Stability Reserve for the EU ETS until 2030

Analysis of the MSR and the expected developments relevant to the carbon market demonstrate that a rate of 12 per cent of the total number of allowances in circulation to be placed in the reserve each year after 2023 is insufficient to prevent a significant increase of the surplus of allowances in the EU ETS. Therefore, after 2023, according to the proposal, the percentage figure should continue to be 24 per cent, and the minimum number of allowances to be placed in the reserve should also continue to be 200 million.

More stringent benchmark approach and establishing conditionality for free allocation

An update of the EU ETS benchmarks is proposed to follow the emission reductions in sectors and sub-sectors more closely, by increasing the maximum update rate to 2,5 per cent per year as of 2026 instead of the current 1,6 per cent.

In the case of installations covered by the obligation to conduct an energy audit under the EED, free allocation shall only be granted fully if the recommendations of the audit report are implemented, to the extent that the pay-back time for the relevant investments does not exceed five years and that the costs of those investments are proportionate. Otherwise, the amount of free allocation shall be reduced by 25 per cent. The amount of free allocation shall not be reduced if an operator demonstrates that it has implemented other measures which lead to greenhouse gas emission reductions equivalent to those recommended by the audit report.

Interaction with CBAM

No free allocation shall be given to installations in sectors or sub sectors to the extent they are covered by other measures to address the risk of carbon leakage as established by the CBAM Regulation.

Interaction with ESR

Sectors outside the EU ETS are covered by the Effort Sharing Regulation (ESR), which establishes an overall EU-wide greenhouse gas emission reductions target, as well as binding annual targets for individual Member States to be achieved by 2030. The ESR covers among others the road transport and buildings sectors, as well as emissions from domestic navigation.

By providing the additional economic incentives (through carbon pricing) necessary to achieving the cost efficient emission reductions in buildings and road transport, the new ETS would complement the ESR in the current scope, which maintains incentives and accountability for national action.

Carbon Capture and Utilisation

The proposal establishes that surrender obligations do not arise for emissions of greenhouse gas that end up permanently chemically bound in a product so that they do not enter the atmosphere under normal use.

Aviation's contribution to the EU’s economy-wide emission reduction target and appropriately implementing a global market-based measure

The European Commission is also proposing to phase out free emission allowances for aviation and align with the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). 

This proposal introduces amendments to the EU Emissions Trading System (EU ETS) legislation in relation to its application to aviation to ensure that: 

  1. aviation contributes to the 2030 emissions reduction target in accordance with the European Green Deal; 
  2. the EU ETS is amended as appropriate in respect of the ICAO’s Carbon Offset and Reduction Scheme for International Aviation; and 
  3. allocation of emission allowances in respect of aviation is revised to increase auctioning

Next steps

The legal basis for this proposal is Article 192 TFEU.

The proposal is amending Directive 2003/87/EC and Decision (EU) 2015/1814 to strengthen the EU Emissions Trading System and the MSR Regulation (EU) 2015/757. After approval by both the European Parliament and the EU Council, the amended Directive enters into force. For this amended Directive the date is expected to be 1 January 2024.

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Chris Winkelman

Chris Winkelman

Energy - Utilities - Resources Industry, Tax, Partner, PwC Netherlands

Tel: +31 (0)65 154 18 97

Niels Muller

Niels Muller

Partner, Energy transition and sustainable energy, PwC Netherlands

Tel: +31 (0)65 160 08 61

Juliette Marsé

Juliette Marsé

Director (Tax) - Energy, Utilities & Resources, PwC Netherlands

Tel: +31 (0)63 419 61 08

Mohammed Azouagh

Mohammed Azouagh

Manager - Tax, Sustainability and Incentives, PwC Netherlands

Tel: +31 (0)62 380 36 54

Sander Borremans

Sander Borremans

Manager Indirect Taxes, PwC Netherlands

Tel: +31 (0)61 029 42 75