The European Council and Parliament reached a “provisional political agreement” on key policies of the Fit for 55 legislative package, aiming to “reduce emissions and address their social impacts”. Once adopted, the new policies will expand the ETS framework, introduce a new “Social Climate Fund” and increase the existing Modernisation and Innovation Funds. The deal is pending formal adoption in both institutions.
“The agreement on the EU Emissions Trading System and the Social Climate Fund is a victory for the climate and for European climate policy,” said the Czech Minister for Environment, Marian Jurečka. “This will allow us to meet climate objectives within the main sectors of the economy while making sure the most vulnerable citizens and micro-enterprises are effectively supported in the climate transition. We can now safely say that the EU has delivered on its promises with ambitious legislation and this puts us at the forefront of fighting climate change globally.”
A more “ambitious” ETS framework
The agreement outlines measures to make the current ETS framework, which has cut the bloc’s emissions by 41 per cent since 2005, “more ambitious” in order to cut down even further emissions. As part of this, the European Council and Parliament agreed to increase the overall ambition of emissions reductions by 2030 in the sectors covered by ETS to 62 per cent. Additionally, the co-legislators agreed to a rebasing of the overall emissions ceiling over two years of 90 and 27 million allowances respectively and increase the annual reduction rate of the cap by 4.3 per cent, per year from 2024 to 2027 and 4.4 from 2028 to 2030.
Separately, the Commission will assess and report by 31 December 2026 on the possibility of including the municipal waste incineration sector in ETS with a view to including it from 2028 and assessing the need for a possibility of an opt-out until 2031.
Maritime shipping emissions will also now be included within the scope of the ETS framework. The co-legislators agreed on a “gradual introduction” of obligations for shipping companies to surrender allowances: 40 per cent for verified emissions from 2024, 70 per cent for 2025 and 100 per cent for 2026.
Most large vessels will be included in the scope of ETS from the start. Big offshore vessels of 5,000 gross tonnages and above will be included in the MRV on the monitoring, reporting and verification of CO2 emissions from maritime transport regulation from 2025 and in ETS from 2027. General cargo vessels and off-shore vessels between 400-5,000 gross tonnage will be included in the MRV regulation from 2025 and their inclusion in ETS will be reviewed in 2026.
Major changes ahead for building and road transport
A new separate ETS framework will be established for the buildings and road transport sector and fuels for additional sectors, seeking to “ensure cost-efficient emissions reductions in these sectors that have been difficult to decarbonise so far”.
More specifically, the new system, which will enter into force in 2027, will apply to distributors that supply fuels to buildings, road transport and certain other sectors. Part of the revenues from the auctioning will be used to support vulnerable households and micro-enterprises via a new dedicated “Social Climate Fund”.
The Social Climate Fund will support vulnerable households, micro-enterprises and transport users to “cope with the price impacts of the new ETS for the buildings and road transport and fuels for additional sectors”.
The agreement extends the scope of the system to fuels used in certain industrial sectors. As a consequence, it has been agreed to increase the size of the Social Climate Fund, correspondingly.
The co-legislators agreed on a temporary possibility for member states to exempt suppliers from surrendering allowances until December 2030, if they are subject to a carbon tax at a national level, the level of which is equivalent to or higher than the auction price for allowances in the new the ETS framework.
Simplified monitoring reporting and verification requirements for small fuel suppliers will also be created. Should energy prices be “exceptionally high”, the start of the new ETS would be delayed until 2028. Once the system has started, if the price of allowances exceeds 45 euros over a certain period of time, additional allowances would be released, increasing the supply on the market.
More details on the Social Climate Fund
The new Social Climate Fund would be part of the EU budget and supported by externally assigned revenues up to a maximum amount of 65 billion euros. This budgetary architecture allows the fund to benefit from a series of guarantees linked to the European budget, without reopening the EU’s multi-annual financial framework.
The fund would be established over the period 2026-2032, with the eligibility of expenditures from 1 January 2026 based on auctioning of 50 million allowances in 2026 to allow for support at the start of the fund while the new ETS would provide for the financing of the Fund as of 2027.
Each Member State would submit a “social climate plan” to the Commission, containing the measures and investments they intend to undertake to “cushion the impacts of the new ETS framework on vulnerable households”. Such measures could include increasing the energy efficiency of buildings, renovation of buildings, decarbonisation of heating and cooling in buildings and uptake of zero-emission and low-emission mobility and transport, and measures providing direct income support in a temporary and limited manner.