In principle, it covers the EU's Emission Trading System emissions from electricity production, district heating, large industrial plants, steel factories, oil and gas production and some European air traffic. But there are still many free allowances in circulation, and this distorts the market. Aviation and the energy-intensive industrial companies only have to buy a limited share of their CO₂-quotas, and other industries such as the maritime industries still ride on a free ticket. Thus, less than half of the EU countries' CO₂emissions covered, and this has created a massive market failure. The free quotas have delayed the industry's climate investments, states the Court of Auditors in their report. 

For many years have the prices on the CO2 quotas was relatively low because there were many free quotas in circulation, but as some of the free quotas have been withdrawn from the market, prices have risen. WHEN the war in Ukraine broke out, the quota price rose to around 80-90 euros per tonnes of CO₂ – but in September 2022 they fell again to around 66 euros per tonnes of CO2. If you want to accelerate the green transition and make it attractive to invest in e.g. solar and wind energy rather than fossil fuels, it is important to keep quota prices at a high level and that all sectors of society are included. But many still get away very cheaply. Eg. gets energy-intensive mineralogical companies such as Aalborg Portland compensated almost 80 per cent. of their CO2 emissions with free quotas. 

Reform on the way 

The EU institutions are currently negotiating a reform of the allowance trading system, and this will hopefully pave the way for a faster farewell to the free allowances. Buildings and road transport will gradually be covered, and the free quotas for the maritime industries and aviation are expected to be phased out. The European Parliament is currently pushing for the free quotas to be phased out from 2026 until 2030. It is also proposed that the maritime industries should not have any more free quotas from 2027. It is still unclear where the final compromise will land, but the is very crucial that a high pace of reform is ensured, so that as many as possible of the free quotas can be phased out quickly, so that all sectors are treated equally on the market. And the Commission also proposes that the mineralogical companies should have their quotas almost halved. A company like Aalborg Portland is only expected to be covered 44 per cent. of their CO2 emissions with free allowances in 2030. 

Unrest about future prices 

During 2022, the Commission has created some unrest about the allowance trading system. To finance REPowerEUplan, the Commission has exceptionally proposed to raise DKK 20 billion. euros by auctioning off extra allowances on the ETS exchange, and at current prices this can send over 300 million quotas on the market. The proposal immediately caused quota prices to dive by more than 10 euros per ton. And the prices have since fallen by approximately 25 euros per ton.  

That kind of emergency intervention and supply shock should be avoided. It is better to carry out an overall reform of the quota trading system, so that long-term clarity is created for the market participants. If most free quotas are removed, all sectors are included and quota prices are raised, it could bring in up to DKK 50 billion. euros per year, shows one research report.  

The money should be reinvested in the green transition. Part of the proceeds could, for example, go to a green transition fund in the EU, which can help energy-intensive businesses to make investments in cleaner technologies, renewable energy and new innovative solutions, so that they can cope with the new green market conditions in a few years.  

Green tax reforms  

In addition to the upcoming reform of the allowance trading system, all member states should implement green tax reforms that ensure a high floor under CO₂- emissions for all sectors. Such a CO₂- tax should reflect the socio-economic costs of the pollution and be fair and transparent. Several EU countries are implementing green tax reforms, and Denmark has entered into a broad one settlement to gradually raise the CO2 tax to DKK 1125/tonne towards 2030. But a full DKK 750 of this amount is what the settlement parties expect to be covered by the EU's quota price in 2030. The real Danish tax at the top of the CO2 quota price is only DKK 375 for companies with quotas. The upcoming reform of the EU's quota trading system can therefore also have a major impact on the green taxes that Danish companies will have to pay in the future. At the same time, the green form of tax has given an extra discount to the mineralogical companies, who get off cheaper and have to pay a maximum of DKK 100/ton of CO2 on top of the expected EU quota price of DKK 750.  

The political agreement is not as ambitious as the recommendations from the economic experts and the Climate Council. They have proposed that the companies should at least pay DKK 1.200-1.500/ton. One of the main political concerns has been the so-called carbon leakage and loss of jobs if the tax is set too high for the energy-intensive companies that find it difficult to adapt. But it is a problem that the EU might be able to help solve.  

CO2 border tax on the way in 2026 

The EU institutions are negotiating to introduce a so-called CO₂-trade tax at the external borders – the so-called CBAM. In March, the Council adopted some general principles for this tax, which will cover imports of iron, steel, cement, fertilizers, aluminum and electricity (produced with fossil fuels), all of which have a heavy CO₂- load. The European Parliament has also adopted a common position on CBAM. But there are still a number of technical challenges that must be resolved in the negotiations with the European Parliament and the Commission. It is planned that the new tax will be phased in gradually from 2026, but it is not expected to be fully phased in until 2035, when all free CO2 trading quotas are planned to be phased out. If it is possible to reach an agreement to remove the free quotas in the quota trading system and to establish a CO₂- tax at the border, it can speed up the green transition in Europe. The slow phasing in of the new border tax means that companies have plenty of time to prepare for the new rules, but it would be much better for the environment if the politicians had the courage to advance the timetable.