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The European Parliament’s draft report by MEP Peter Liese on revising the EU’s Emissions Trading System fails to strengthen the scheme’s climate targets while opening up multiple routes to hand out more free emission allowances and offer offsets, enabling heavy industries to profit from their pollution.

German Christian Democrat MEP Peter Liese has released his draft report on the much-anticipated overhaul vision of the European Union’s Emissions Trading System (ETS), a central plank of the EU’s efforts to decarbonise energy-intensive industry and, following ongoing reforms, to reduce the carbon footprint of the wider economy.

However, Liese’s proposals, put forward in his capacity as the European Parliament’s rapporteur on reforming the ETS, will not reduce emissions to levels that take the heat off the climate and avert dangerous global warming.

“Rather than strengthen the EU’s carbon market, Liese’s recommendations will literally cause the EU ETS to go up in smoke,” said Carbon Market Watch’s Policy Director Sam Van den plas. “It’s time for responsible policymakers to just look up and open their eyes to the climate disaster we are hurtling towards.”

Carbon leakage or carbon wreckage?

By proposing multiple routes to granting polluters free emissions permits, Liese is rewarding polluters rather than making them pay.
One blatant example of this concerns the proposed Carbon Border Adjustment Mechanism (CBAM), which is meant to encourage EU companies to decarbonise more rapidly by imposing a carbon tax on polluting imports and to avoid so-called carbon leakage, the largely hypothetical risk that polluting industries will relocate outside Europe due to more stringent environmental demands.

Instead of demanding the phasing out of free emissions allowances in the ETS to enable the CBAM to function effectively as a climate action tool, Liese proposes to add a new “Carbon Leakage Protection Reserve” to store free allowances temporarily and return them to companies if the carbon tax proves ineffective. This not only amounts to paying the polluter and carbon protectionism, it would also set the CBAM up to fail while allowing polluting industries to walk away with obscene windfall profits.

Liese also proposed to add a ‘bonus-malus’ system, which rewards companies that do well in reducing their emissions with extra free allowances. At the same time, he is undercutting the Commission proposal by offering large polluters the opportunity to receive more free allowances coming from other sectors like shipping and aviation.

“It is a good idea to have a bonus malus system but this is more like a malicious bonus system,” explains Agnese Ruggiero, CMW’s policy officer specialising in industrial decarbonisation. “Liese’s proposal aims to protect European industry from losing free allowances instead of creating real incentives to decarbonise. It’s incomprehensible that carbon leakage protection is again made to trump climate protection.”

Read our blueprint for a fair and effective CBAM.

Another problem with the draft report relates to the proposed expansion of the ETS to cover new sectors. The introduction of the new system has been moved from 2026 to 2025, with a temporary opt-out clause until 2027 for fuels for private road transport and the heating of residential buildings. It also extends the emissions trading system for buildings and road transport to emissions trading for all fuels. This risks opening up an unhelpful and disruptive discussion on carbon leakage protection measures in even more sectors, such as process heating in installations not yet covered by the EU ETS.

Far from shipshape

Liese’s draft report takes two steps forward and one step back on how and when to include the maritime sector in the EU ETS, and does not significantly improve the flawed Commission proposal.

“There is no need to delay climate action any longer for the shipping industry. This sector has never paid for its pollution, and we cannot waste more time before finally starting to tackle their contribution to the climate breakdown,” points out Wijnand Stoefs, a CMW policy officer focusing on shipping and carbon removals.

The MEP recommends that shipping be added to the EU ETS a year ahead of the Commission’s proposal, in 2025 instead of 2026. However, Carbon Market Watch believes that the unjustified exemption of the maritime sector must end immediately. All incoming and outgoing voyages should be fully covered (so-called full-scope coverage) from the start.

The rapporteur proposes the creation of an Ocean Fund to help finance climate action, which is, in principle, a good idea. However, Liese undermines the effectiveness of this proposed fund by allowing it to be used to finance “low-carbon” fuels when it should be utilised exclusively to fund no-carbon fuels.

No cheating the atmosphere

Liese’s draft report seriously undermines the environmental effectiveness of the EU ETS by allowing companies to use carbon removals and carbon capture and utilisation (CCU) to supposedly offset some of their emissions, offering another easy escape hatch for large polluters. To learn why using carbon removals for offsetting purposes is problematic, read this.

While removals do need to be upscaled in the coming decades to reduce the level of CO2 in the atmosphere, reducing emissions must remain the primary goal. In addition, some of these practices would not benefit the climate at all and might even damage it: plastic bottles are not permanent carbon stores and burning forests for bioenergy carbon capture and storage (BECCS ) can never be a climate solution.

“Bringing removals and CCU into the EU ETS would constitute a futile attempt to cheat the atmosphere because continued emissions would be hidden behind false climate solutions,” says Stoefs.

For more on carbon removals, read our new briefing ‘Respecting the laws of physics: Principles for carbon dioxide removal accounting’.

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