EU Considers Major Changes to Free CO2 Permits in Carbon Market Reform

Overview of Carbon Market Reform

By Kate Abnett

Current System of Free CO2 Permits

BRUSSELS, Feb 10 (Reuters) - The European Union is considering overhauling its system of free CO2 permits for industries, as part of a revamp of its carbon market, an internal document seen by Reuters on Tuesday shows.

Proposed Options for Reform

Brussels is redesigning the EU's Emissions Trading System, its most important climate change policy, which forces power plants and industries to buy CO2 permits when they pollute.

Political Sensitivity and Industry Impact

The internal European Commission presentation shows Brussels is considering three options to revamp the current ETS system of giving industries some free CO2 permits. That currently lessens their overall pollution costs and helps industries compete with foreign firms that do not pay for their emissions.

One option would scrap free CO2 permits entirely and instead require industries to only buy and surrender CO2 permits for a limited share of their emissions, with this share gradually increasing until 2034, the document said. 

Another would make free permits conditional on industries making low-carbon investments. A third would broadly maintain the current approach of free CO2 permits, the document said.

A Commission spokesperson declined to comment on the document.

"The 2026 ETS Revision will assess various ways of providing this protection while supporting the industry in its decarbonisation," the spokesperson said of free allowances.

The Commission plans to propose the carbon market revision in the third quarter of the year.

The EU's flagship climate policy has become increasingly politically sensitive, as industries struggle with high energy prices and cheaper imports. 

Czech Prime Minister Andrej Babis urged the EU to limit the carbon price, ahead of a meeting of EU leaders on Thursday to discuss industrial competitiveness. 

The EU ETS caps the amount of CO2 permits released into the market, and decreases this cap each year to make sure emissions fall over time.

A key part of the ETS redesign will be to avoid the cap falling to zero in 2039, as it is currently designed to - and rework it to instead bring industries in line with the EU's climate target to cut domestic emissions 85% by 2040, a goal that will allow them to continue emitting beyond that date.

The benchmark EU carbon contract was trading at around 80 euros per metric ton of CO2 on Tuesday, lower than last month, when it briefly exceeded 90 euros. 

(Reporting by Kate Abnett; Editing by Alexander Smith)