One consequence of a major reform of the European Union’s emissions trading system in 2023 is that energy-intensive industries (EIIs) will ultimately be exposed fully to carbon pricing. In theory EIIs are subject to carbon pricing already but in practice they have received free allowances to shield them from the carbon price and protect them against foreign competition that is not subject to carbon pricing (and to prevent so-called ‘carbon leakage’). Free allowances allocated to many industrial sites consistently exceeded emissions during the third phase of the ETS (2013-2020), creating market distortions (De Bruyn et al, 2021).
The 2023 ETS reform thus plugs a loophole. However, some issues remain to be dealt with, including the treatment of EU exporters, the sectoral coverage of carbon pricing and the geographical misallocation of subsidies. This analysis discusses these challenges and suggests further steps that might be taken to ensure fair competition among EIIs within the EU and globally.
About the author:
Giovanni Sgaravatti works at Bruegel as an Energy and climate research analyst.