On April 18, 2023, the European Parliament greenlit crucial legislation, solidifying the European Union’s commitment to the “Fit for 55 in 2030 package,” aiming for a 55 percent reduction in greenhouse gas (GHG) emissions by 2030, as compared to 1990 levels. In line with the European Climate Law, Parliament endorsed the Emissions Trading System (ETS) reform, which mandates a 62 percent reduction in GHG emissions in ETS sectors by 2030 compared to 2005 levels.
The ETS reform also includes the gradual elimination of free allowances for companies from 2026 to 2034 and the establishment of a separate ETS II for road transport and building fuels, set to introduce GHG emission pricing in 2027 or 2028, depending on energy price fluctuations. The European Parliament also voted to include GHG emissions from maritime activities in the ETS for the first time and approved the revision of the ETS for aviation.
This move will eliminate free allowances for the aviation sector by 2026 and encourage the use of sustainable aviation fuels. Furthermore, Parliament passed the EU Carbon Border Adjustment Mechanism (CBAM) regulations, which aim to incentivize non-EU countries to enhance their climate ambitions and prevent production relocation to countries with less stringent policies.
The CBAM, covering iron, steel, cement, aluminum, fertilizers, electricity, hydrogen, and certain indirect emissions, will be implemented gradually from 2026 to 2034, in parallel with the phasing out of free allowances in the EU ETS. Importers of these goods will be required to pay the price difference between the carbon price in the country of production and the EU ETS carbon allowance price.
Additionally, Parliament ratified the creation of an EU Social Climate Fund (SCF) in 2026, ensuring a fair and socially inclusive climate transition by supporting vulnerable households, micro-enterprises, and transport users affected by energy and transport poverty. The SCF will be financed through auctioning ETS II allowances up to €65 billion, with an extra 25 percent sourced from national resources, totaling an estimated €86.7 billion. Upon formal endorsement by the Council, the legislation will be published in the EU Official Journal and come into effect 20 days later.
