EU reaches provisional deal on emissions trading for road transport and buildings, maritime transport and aviation

Negotiations between the Council of the EU, the European Parliament and the Commission reached an accord 18 December 2022 concerning the Emissions Trading Directive, an MRV Regulation on reporting of maritime transport emissions, and the Social Climate Fund.

The revised Directive will boost the current EU emissions trading regime - which will be broadened to cover maritime transport - and establish a new, separate emissions trading system for road transport and buildings. Provisional agreement on enhancing aviation emissions trading was also reached earlier in December.

"I am pleased that the EU has agreed on emissions trading, and particularly gratified that the special characteristics of winter navigation have been accommodated in emissions trading for shipping," says Minister of Transport and Communications Timo Harakka.

The EU climate package includes numerous legislative initiatives. Tripartite negotiation of transport proposals will continue in the middle of next year, focusing on Regulations to promote the use of alternative fuels in aviation and maritime transport, and on a Regulation governing the distribution infrastructure for alternative fuels. A provisional deal on CO2 emission limits for cars and vans was already reached in October.

Emissions trading for road traffic and separate heating of buildings to begin in 2027

The negotiations also reached an accord on an entirely new branch of emissions trading that will focus on road transport and separate heating of buildings. This trading will cover the carbon dioxide emissions of fuels used in these sectors. The regulatory regime will apply to fuel distributors, which in practice means operators that are liable for excise duty. While auctioning of emission rights under the new emissions trading regime will begin in 2027, the start of the scheme will nevertheless be postponed until 2028 owing to exceptionally high energy prices.

The system will also include a price stability mechanism that releases additional emission rights to the market if the price rises very rapidly, or if the price of emission rights exceeds EUR 45 per tonne over a certain period. Releasing additional emission rights will curb any increase in their price.

The negotiations also settled on a tax exemption that would enable a Member State to opt out of the new emissions trading scheme until the end of 2030. The condition for applying this exemption is that the Member State imposes a carbon dioxide tax on fuel that exceeds the average price level of emission rights. A Member State will anyway be required to pay its contribution towards a Social Climate Fund on which provisional agreement was reached at the same time as the deal on emissions trading. The Social Climate Fund will primarily be financed from auction revenues collected under the new emissions trading scheme. Finland has been particularly critical of the new fund.

An emission reduction target for both separate heating of buildings and road transport will continue to be part of the national targets of Member States in the course of implementing the EU burden-sharing Regulation. The new emissions trading scheme is expected to promote cost-effective achievement of the goals of this Regulation.

Road transport is responsible for one fifth of all greenhouse gas emissions in Finland.

Maritime transport to be included in emissions trading from 2024

Maritime transport will be gradually incorporated into the current emissions trading regime over the period from 2024 to 2026. The provisionally negotiated outcome envisions the start of maritime transport emissions trading with emissions released in 2024, meaning that shipping companies will return emission rights for the first time in mid-2025 for maritime transport emissions of 2024. Emission rights will be returned for a proportion of emissions in the initial years of the scheme, meaning 40 per cent of emissions in 2024 and 70 per cent of emissions in 2025. Securing a special accommodation for winter navigation in emissions trading was an important negotiating objective for Finland. The provisional deal gives special consideration to ice-strengthened ships until the end of 2030.

Commercial transportation of passengers and cargo on ships with a gross tonnage of 5,000 or more will be included in emissions trading from 2024. Offshore vessels will also be included as of a later date. Greenhouse gas emissions will initially include carbon dioxide, with emissions trading expanding in 2026 to cover emissions of methane and nitrous oxide. Emissions trading will cover 100 per cent of emissions generated on journeys within the EU and at EU ports, and 50 per cent of emissions arising on routes to third countries. Member States will be free to choose whether to introduce a temporary exemption from emissions trading for passenger and ropax transport to islands with fewer than 200,000 inhabitants within the same country.

Effectiveness of aviation emissions trading to be increased

Aviation has been covered by EU emissions trading since 2012. Negotiations held at the beginning of December sought to make emissions trading more effective, with a view to achieving greater reductions in aviation emissions and promoting realisation of EU emission reduction targets. Amendments to the Emissions Trading Directive will also enable implementation of the CORSIA emission compensation system for international air traffic approved by the International Civil Aviation Organization ICAO.

Under the provisional deal, current EU emissions trading would apply until the end of 2026 on flights within the European Economic Area (EEA). CORSIA, on the other hand, would govern flights from the EEA to third countries if the destination country was covered by the system. Any expansion of emissions trading would be decided on the basis of a CORSIA impact assessment to be conducted after the 2025 ICAO Assembly.

The aim is to phase out the free distribution of aviation emission rights over a three-year transition period, with all emission rights included in the auction as of the beginning of 2026. Airlines would nevertheless retain an opportunity to receive limited emission rights without charge if they replaced fossil aviation kerosene with more costly renewable fuel. The mechanism seeks to increase the use of renewable aviation fuels and promote emission reductions by covering part of the difference in price between fossil and renewable aviation fuel.

What's next?

The agreement reached on the Emissions Trading Directive, on the MRV Regulation on reporting of maritime transport emissions and on aviation emissions trading will now be forwarded to the Committee of Permanent Representatives (COREPER) for further consideration. The outcome of the negotiations should then be approved at a meeting of the Council of Ministers. Official approval by the European Parliament is also required. The Directives and the MRV Regulation will take effect 20 days after they are published in the Official Journal of the European Union.

Enquiries:

Requests for interviews and additional information during the Christmas holiday period should be addressed to the Communications Unit of the Ministry: [email protected]

Emissions trading for road traffic and buildings

Niko-Matti Ronikonmäki, Director of Unit, tel. +358 29 534 2129, [email protected], Twitter @ronikni

Valtteri Härmälä, Senior Specialist, tel. +358 29 534 2039, [email protected], Twitter @ValtteriHarmala

Emissions trading for maritime transport

Päivi Antikainen, Director of Unit, tel. +358 50 382 7101, [email protected], Twitter @PaiviAntikainen

Niina Honkasalo, Ministerial Adviser, tel. +358 50 302 8123, [email protected], Twitter @HonkasaloNiina

Emissions trading for aviation

Päivi Antikainen, Director of Unit, tel. +358 50 382 7101, [email protected], Twitter @PaiviAntikainen

Janne Mänttäri, Senior Ministerial Adviser, tel. +358 40 069 3544, [email protected]