Between the Scylla and the Charybdis of the European Emissions Trading System

Companies facing new challenges by the amended regulations.

Pact Capital AG (Geneva, Switzerland), the sustainability arm of Holt Global Group is from now on offering its services for Greek power and manufacturing companies to help them understand the regulatory background of emissions trading and compliance with the European Emissions Trading System. In this article, Bernadett Papp, Head of Market Analys of Pact Capital AG raises awareness on the challenges European businesses face in the upcoming period.

Greek businesses in all sectors from power producing to manufacturing and aviation, had to face several difficulties in the last years. The country has just recovered from a financial crisis when a global pandemic forced employees to stay at home. Once people could breathe free again a war in Europe questioned energy security and affordability for both industries and households.

The answer of the European Commission on all these challenges is the greening and digitalization of the economy. It set a long-term goal of becoming the first climate neutral continent by 2050 and to get there, it pledged to reduce emissions by at least 55% by 2030.

Decarbonization in the industry

In spring 2023, the European Union adopted many legislations under the European Green Deal and the Fit for 55 package. While the measure will create many new opportunities for innovation, investments and jobs, it will also bring new challenges and tasks for the companies.

The European Emissions Trading System has been created to be and with time it also became the cornerstone of the decarbonization process of the European economy. It sets a cap on the emissions of thousands of heavily emitting companies (power plants burning coal and gas, cement, steel, glass paper and fertilizer manufacturers, aviation within the European Economic Area etc.). This cap consists of tradable European emission allowances (so called EUA) the number of which is decreasing every year. Each allowances represents the right to emit one ton of carbon dioxide equivalent. The companies covered by the system must surrender a quantity of allowances equivalent to their emissions in the previous calendar year. Some of them are entitled to receive a certain number of allowances for free from their national authorities, but this free allocation might be not enough to cover their emissions. In this case the companies can purchase the missing allowances in auctions, or they can use the services of intermediaries like Pact Capital AG, the sustainability arm of Holt Global Group to avoid penalties and other sanctions.

After a pilot phase from 2005 to 2007, the European Emissions Trading System started from 2008 and served as a model for other countries and regions worldwide. Since its start, it had to undergo several reforms to become more effective and to incentivize green investment among participating companies.

Progress to accelerate from 2024

The last round of reforms has been adopted by the European legislative bodies this year as a response to the recent crises and as a result the European Union will be able to achieve its Paris Agreement target.

Most importantly, emissions of the companies covered by the system have to be reduced by 61% by 2030 which will result in a steeper decrease of the total number of allowances available for the participants. Between 2013 and 2020, the cap decreased by 1.74% annually (the so-called linear reduction factor) which increased to 2.2% from 2021. Next year, however, the linear reduction factor increases to 4.3% and from 2028 until 2030 a rate of 4.4% will be implemented.

“It set a long-term goal of becoming the first climate neutral continent by 2050 and to get there, it pledged to reduce emissions by at least 55% by 2030.”

In 2024, the cap will be also rebased by 90 million allowances. A step without precedent in the past, but which will be repeated in 2026 with further 24 million allowances.

New measure on the CO2 content of imported goods

From 1 October 2023 already, companies in the cement, aluminium, fertilizer, electricity, iron and steel sectors will have to report the carbon-dioxide content of the goods they are importing from third countries. If in the third country there are no equivalent rules on emissions, the companies will have to purchase certificates from their national authorities starting in 2026. The measure, called carbon border adjustment mechanism or CBAM also implies in the step-by-step phase out of the free allowances of the above-mentioned sectors. Until now, companies received free allocation in order to not relocate their production to third countries where there is no price on their emissions, so called carbon leakage. With the implementation of the CBAM however it won’t make sense anymore to move production outside of the EU.

Maritime sector to face a new challenge

The system will also include the maritime sector from 2024. Ships above 5,000 gross tonnage will have to comply with the system’s requirements of monitoring, reporting and verifying emissions and they will have to surrender allowances equivalent to 100% of their emissions between EU ports and at berth and 50% of the emissions between an EU port and a port in a third country. Contrary to industrial companies, the shipping sector won’t receive any free allowances. They will purchase the units they need in auctions or in the secondary market. To ease their burden a little bit, they only have to comply for 40% of their 2024 emissions, but this ratio will increase to 100% by 2026.

Trading event

The upcoming changes to the system and relates challenges for businesses exceed the scope of an article. If your company is covered by the European Emissions Trading System and you have special questions about compliance, come and meet Pact Capital’s analysts and sales team to discuss the appropriate hedging strategy on 12 October 2023 in the Hotel Electra Metropolis Athens.


17:00 Arrival — Coffee & refreshments

17:30 Upcoming changes in the EU ETS and EUA price outlook by Bernadett Papp, Head of Market Analysis at Pact Capital AG

18:15 Trading strategies for compliance entities — by Márk Dányi, Head of Carbon Trading at Holt Global AG

18:45 Networking — Meet our experts while enjoying delicious finger food from the chef of Electra Metropolis Athens