The delivery of a 2030 target that is inline with the EU’s long-term goal of reaching net-zero greenhouse emissions by 2050, will be dependent on whether or not the EU ETS will be amended for this purpose. There are two components to making the EU ETS fit for its purposes: amending the cap to deliver at least –65% emission reductions by 2030 and replacing the system of free allocation with a more targeted support system to stimulate industrial transformation to take place already before 2030.

As the world moves steadily and rapidly towards the same goal of carbon neutrality by the second half of the century and more than half of the world’s GDP is covered by net-zero pledges, the old rationale for carbon leakage protection has fundamentally changed. The introduction of a CBAM becomes a better suited policy innovation for this point in time as it has the benefit of minimising divergence between the pathways takes by different countries towards the same goal. A CBAM is also a necessary step for the EU in the direction of setting global emissions accounting standards and taking responsibility for its own import and consumption carbon footprint.

If the unsustainable system of free allowances continues unamended as thus far, it is unlikely the EU ETS will provide the rights set of incentives and financial support to stimulate industrial transformation at the scale required before 2030. Additionally, the fact that the proportion of free allowances will soon run into the EU ETS cap raises major uncertaintiesfor investments in long-term projects for industry decarbonisation, requiring new instruments to be introduced to replace the old system.Instead, the combination of a CBAM with a new fund made up of the freed up allowances and focused on deploying innovation at scale, by reducing operational costs of projects, etc. Should be promoted. Such a fund would be complementary to the Innovation Fund because it would seek to maximise the effects and success stories developed there, by commercialising them at scale.

This report models four scenarios for how a CBAM could be made part of the Fit for 2030 package to be launched in July 2021 as part of the EU Green Deal agenda and concludes that at least 75% coverage for the selected sectors should be pursued. This option has the benefit of generating more income for innovation and deployment earlier on in Phase IV (already in 2026) therefore having the possibility of turning the next decade into one of action and success for the transformation of heavy industry in the EU.