ETS2 Reform to Stabilize Market, Carbon Shipping Tax Postponed
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The European Commission floated a set of proposed changes to the incoming ETS2 carbon market for fuel emissions from the transport and domestic sectors. Commission president Ursula von der Leyen announced last Tuesday that the regulator would advance measures to moderate the risk of high prices when the new market gets under way in 2027.
And in a letter to member state governments, climate commissioner Wopke Hoekstra said the Commission would amend the ETS2 market stability reserve to inject twice as many extra permits into the market should prices top €45/tonne. The Commission is expected to clarify shortly that as many as 80 million extra ETS2 allowances could be added to supply over a 12-month period, covering the years 2027 to 2029. The first auction of ETS2 permits is also expected to be brought forward to mid-2026 in an effort to satisfy early compliance demand.
ETS2 will be a separate market from the main ETS (“ETS1”), which has operated since 2005. ETS2 will have its own annually adjusted cap, allowances and auctions, and ETS1 permits will not be eligible for use. As many as 19 EU member states signed earlier this year a joint paper highlighting the risks of high prices, and there had been some speculation that a few countries were even seeking the postponement of ETS2 until 2030.
The proposed reforms are likely to lower ETS2 prices, analysts have found. ClearBlue Markets analysts said the new market should have prices of around €55/tonne when it starts, “reflecting both the discovery phase of a new market and reassurance from additional early supply.”
Levels will then climb to around €103/tonne by 2030 (compared to an initial estimate of €120/tonne), before climbing to €214/tonne by 2035, compared to an earlier estimate of €272/tonne.
Carbon Shipping Tax Postponed
The International Maritime Organization (IMO) has voted to postpone a decision setting up a global emissions intensity mechanism, known as the Net Zero Framework, after intense opposition from a group of countries led by the United States. This carbon pricing mechanism is separatefrom cap and trade programs but shows the growing global interest in carbon pricing.
During the IMO’s Marine Environment Protection Committee session in London, 57 countries voted in favor of postponing a decision by a year and 49 countries were against it. US president Donald Trump had criticised the proposal and threatened sanctions, turning vessels away from US ports and penalties against countries and companies should the measure pass.
The United States and other allied countries had proposed alternative rules governing the adoption and entry into force of the NZF that would make it more difficult to implement, while a group of states led by the EU pressed for a final decision.
As proposed, the NZF would require ships of more than 5,000 gross tonnes to meet progressively tighter emissions-intensity limits, with two “tiers” of compliance available to shippers. Vessels that failed to achieve their mandated target would be required to buy “remedial units” at different costs according to tier.
Under a “base tier”, ships would be required to achieve a 4% cut in greenhouse gas emissions per tonne of fuel by 2028, and a 30% reduction by 2035. Remedial units would cost $380/tonne.
Under the second tier, known as the “Direct Compliance” goal, ships would target reducing the volume of greenhouse gases emitted by 17% by 2028, and by 43% in 2035. To mitigate the steeper target, the cost of remedial units would be just $100/tonne.
Some countries proposed including language in the NZF agreement that confirmed it would be the only carbon pricing system applying to international shipping. The measure did not pass, but reflects a build-up of pressure on the European Union and UK to halt their inclusion of shipping in the EU and UK Emissions Trading Systems.
The NZF would not interact with any other European climate measures such as CBAM, since the latter covers industrial products rather than transportation.
Carbon Market Roundup
The weighted global price of carbon was $55.43, down 1.2% week over week. EUAs were down 1.4% for the week at €78.32. UKAs were down 3.3% at £54.60. CCAs were down 1.5% for the week at $32.24. RGGI was up 7.0% at $24.91. WCAs were up 1.0% at $65.50.
