The great absence in the Emissions Trading System and Carbon Border Adjustment Mechanism: regions and cities

Emissions from industry
27 April 2022
The great absence in the Emissions Trading System and Carbon Border Adjustment Mechanism: regions and cities

The sustained soaring of energy prices since summer 2021, exacerbated by the illegal Russian invasion of Ukraine, put the European Green Deal in the spotlight again, as well as the need to look at more secure, clean and affordable energy sources, to stop the EU addiction to fossil fuels.

Energy poverty and the COVID-19 pandemic are only the latest tips of the climate crisis iceberg. This is a long standing battle for the European Union and it has been three years since it developed a new and more ambitious plan to shape a more sustainable growth strategy in order to face the current climate emergency and leave no one behind. Through the European Green Deal, the EU is looking at mitigation and adaptation solutions in all sectors of our economy in order to reach climate neutrality by mid-century through a just, green and sustainable growth. On 14 July 2021, the European Commission adopted a series of legislative proposals (the so-called FitFor55 package) setting out how it intends to achieve it, including the intermediate target of an at least 55% net reduction in greenhouse gas emissions by 2030. The package proposes to revise several pieces of EU climate legislation, including the revision of the EU Emissions Trading System (ETS) and the establishment of a Carbon Border Adjustment Mechanism (CBAM).

Massively cutting greenhouse gas (GHG) emissions is the only way to keep global warming well below the 2°C limit set by the Paris Agreement.

But let’s start with the basics.


The protagonists: ETS and CBAM

Considered the EU cornerstone to fight climate change, the EU ETS was set up in 2005 and created a European carbon market, spelled out in the  EU ETS Directive. It works on the 'cap and trade' principle: there is a cap for CO2 emissions generated by industries and a fixed number of allowances available. The EU then gives companies the flexibility to buy them from others so as not to exceed the limit and encounter fines, or to keep or sell them if the emissions rate remains low. This rule requires European industries to certify the CO2 emitted in the EU.

The system operates in trading phases and we are currently in its fourth phase (2021-2030). The ETS framework has undergone several revisions over the years, and it is now called to maintain its coherence with the overarching EU climate policy objectives set out by the European Climate Law. As all sectors must contribute to the effort, the idea is to stop the free allocation of emission allowances, develop a new system for buildings and road transport, include the maritime sector and increase the auctioning of aviation allowances.

All this will be coupled with a second complementary tool, the aforementioned Carbon Border Adjustment Mechanism (CBAM). The Emissions Trading System suffered from a negative spillover due to the increased price of carbon, which was carbon leakage. To avoid this non environmentally-friendly behaviour from continuing, the EU used this new mechanism to monitor EU importers and all their emissions. Moreover, from 2026, importers need to align with the certificate request.

The most interesting novelty is the allocation of the revenues from the emissions allowances of both ETS and CBAM. If, until now, the large majority of them goes directly to the national budget, now the Commission proposes to keep the 25% of ETS revenues and 75% of CBAM revenues for a better cause. We are talking about around €12 billion per year from 2026-2030 for ETS (€9 billion from 2023-2030) and €1 billion per year from 2026-2030 (€0.5 billion on average between 2023-2030) for CBAM. The recipients of these new resources are the Innovation Fund and the Social Climate Fund. The bigger aim is to ensure that no one is left behind in the transition towards climate neutrality, providing financial support for the most vulnerable households, mobility users and micro-and-small enterprises.


What do cities and regions have to do with this?

The European Green Deal can’t be achieved without an active involvement of all regional and local authorities across Europe. The progressive political authorities have this message clear in their mind and are sharing efforts to reshape their communities in a more sustainable way together.

Progressive cities and regions are strongly committed to achieving climate neutrality. For the PES Group, having the support of a just Green Deal that leaves no people and no territories behind is a key political priority.

PES Group member and Lord Mayor of Mannheim (Germany) Peter Kurz has been appointed as rapporteur of the European Committee of the Regions on these two important files. His opinion “Making ETS and CBAM work for EU cities and regions” already reveals through its title the key messages of our recommendations:

  • Ensuring territorial cohesion, making sure the needs of all territories and vulnerable groups, their specificity and their future are taken into account;
  • Recognising the key role of regional and local authorities in the reduction of GHG emissions and in the success of the ETS reform and the establishment of a CBAM, considering their views and making use of their competences through consultations;
  • Providing regions and cities with the tools to make the change, allocating funds for regional and local budgets, not only national ones, targeting less developed regions with EU funds such as the Modernisation Fund, and allocating part of the revenues of the new ETS to local and regional authorities;
  • Directing money to climate goals by using the revenues managed by local and regional authorities exclusively for climate mitigation and adaptation efforts.


The two new proposals to cut CO2 emissions of the industrial sector are another step towards translating words into actions, through green innovation. The value of the CBAM also lies in the fact that it would hamper unfair and unsustainable competition. These actions inevitably involve other actors beyond the EU in this climate-positive path. The world is called to take responsibility and choose environmental security and green growth over unsustainable patterns and behaviours.


As mentioned before, the financial benefits are considerable: in one year (January 2021 - February 2022) the ETS generated €30 billion that can be directed to consumers, vulnerable regions and groups in need, making sure we build a just transition.

In this consideration, we have to ensure gender equality. As for other situations, also when talking about climate change impacts, women are the most affected and at the same time the more willing to take action and adopt more sustainable habits. They seem to be, indeed, less negatively impacted by the ETS than men.

But the political environment does not reflect women's potential, showing gender imbalance in planning and decision-making.


Making ETS and CBAM work for EU cities and regions

The current proposals by the European Commission do not take the most vulnerable people and territories into consideration enough, even though they will be strongly affected by the changes proposed. Once again, they risk being left behind.

Regions and cities, with their specific aspects, must be directly targeted and the EU must provide the necessary resources to support them in complying with the new rules. It is foreseen that regions and cities will face inequalities in this legislative improvement due to their high-dependence on carbon, low energy tax rates and high energy expenditure shares.

The revision must prevent the risk of energy and mobility poverty for citizens impacted by the system.


As said by the First Vice-President of the Committee of the Regions and PES member, Vasco Alves Cordeiro, “it is more urgent than ever that our climate ambitions and commitment are rooted in multilevel cooperation and active subsidiarity. The ETS must not damage territorial cohesion and must not put at risk the most vulnerable citizens and territories. Europe’s regions and cities have key competences and expertise in the energy and transport sector and must hold an integral role on the EU’s path towards climate neutrality. The ETS is a powerful tool to reduce greenhouse gas emissions yet it must balance climate goals with social protection and economic recovery.”


Regions and cities are key actors of the green energy transition. They are the ones who can ensure that the objectives of the European Green Deal become reality while at the same time ensuring Europe’s territorial cohesion.

Regional and local authorities need to be involved through consultations to assess and report on the efficiency of the new ETS as they have a deep expertise in the sectors covered. Therefore, it is crucial that they are informed and engaged in the implementation of these legislations.


Another way to give them the power to change? Giving a percentage of auction revenues directly to local and regional authorities.


Thanks to the ETS and the CBAM, the EU has the opportunity to realise its ambitious target of a 55% reduction in carbon emissions compared to 1990 levels by 2030, and to become a climate-neutral continent by 2050. 

Progressive local and regional authorities are contributing in proposing solutions to make cities greener and at the same time helping citizens in becoming more energy sufficient.

One example is our Italian PES member Arianna Censi, who is trying to make the city of Milan more environmentally friendly.



Another example is the Occitania Region that proposed a plan to develop renewable hydrogen in order to reduce GHG emissions and atmospheric pollution. Education, training and employment are integral parts of the strategy.


The European Union must give more tools on ground level to develop a comprehensive system, we need to push forward the involvement of regions and cities as key drivers of mitigation and adaptation actions.

As the S&D Shadow Rapporteur and European Climate Law negotiator Jytte Guteland reiterated, the new ETS must support the most fragile and vulnerable individuals, who struggle to afford to move towards more sustainable solutions. The aim is to ensure a better future for all.